AVITA Medical, Inc. Q3 FY2022 Earnings Call

Thank you, Caroline. Good afternoon, everyone and thank you for joining us today. Before I express how excited I am to be here, I want to take a moment to thank and recognize Dr. Mike Perry. Mike Perry served as CEO for the past five years, and we are grateful to him for his important contributions during his tenure. I’m often asked what about AVITA attracted me to come and join the team. As an AVITA Board member for the past five quarters, I’ve become very familiar with the business and its challenges and opportunities. What I saw was a transformative technology that has already brought hope to thousands of patients, and an opportunity to work with a great team to bring this technology to thousands more. To illustrate that, I’d like to share with you a recent patient journey, which has inspired me and the team at AVITA. Charlie Anne Xavier was working on a project at her family’s brewery in Virginia when a lifechanging accident engulfed her in flames, causing third-degree burns to over 85% of her body. At the VCU, Evan-Haynes Burn Center in Richmond, she was given a slim chance of survival with the expectation of a 12-month stay in the ICU. Instead, Charlie Anne left the hospital nine days shy of six months, to which her husband credits RECELL as a significant part of her successful recovery. Charlie Anne and her adoring husband Andre are now focused on giving back by providing hope to anyone suffering from a traumatic burn injury. Thank you, Charlie Anne and Andre for sharing your story of tragedy and triumph. This is the kind of life-changing impact we have seen continue to provide other patients and one of the main reasons I’m thrilled to have the opportunity to join AVITA. This story and others we have related truly demonstrates the importance of our burn work. Now I’d like to take a moment and discuss the initial priorities that I have been focusing on during my first 100 days as CEO. First, developing the commercial plans for burns and soft tissue repair to drive our growth and preparing to execute on that plan. Secondly, the FDA submissions for soft tissue repair and vitiligo are expected during December 2022 with approvals expected in June 2023. Just last week, the FDA informed us that the RECELL system has been granted the Breakthrough Device designation for both the soft tissue repair submission and the vitiligo submission. The Breakthrough Devices program facilitates active interaction with the FDA and prioritizes the review of subsequent regulatory submissions, including our submissions expected in December. Finally, the automation of the RECELL device for the soft tissue repair and burns program, which will be followed by an automated device for vitiligo. Our growth for the next 24 months to 36 months will be driven by the burns and soft tissue repair markets. The soft tissue repair market will expand our hospital call point and treating physician call points by nearly three times. This expansion of market opportunity is the foremost commercial priority of the company. The vitiligo program will be focusing on achieving reimbursement, supporting early commercial cases and clinical development in support of those initiatives, which we believe we will accomplish by Q1 2025. Now let me discuss our Q3 results. We had a strong top-line revenue performance with $9 million in commercial revenue in Q3 2022, which is a 30% increase over the same period the prior year, and a 9% increase on a consecutive quarter basis. Keep in mind, that commercial revenue includes all global revenue, and excludes the $0.1 million in BARDA revenue booked in the quarter. I also have a Japanese market update. In early September, the Ministry of Health and Labor and Welfare, commonly known as MHLW, granted the RECELL System marketing approval for the treatment of acute burns in Japan with very favorable reimbursement of JPY 970,000 for our standard device, which is approximately $7,000 converted at the current exchange rate. We of course, share that revenue with COSMOTEC, the end customer reimbursement price is slightly higher than our current pricing in the US, of which, AVITA receives 40% from our partner COSMOTEC. COSMOTEC is preparing to launch RECELL and we have received an initial stocking order of $555,000 from COSMOTEC in September. At this point of note, other than US revenue, we do not intend to release country-specific revenues in the future, unless there’s some unusual event that causes us to do so. Let me provide an update on our ease of use product. We started selling the ease of use device in Q1 to our larger accounts, which has been well received by our customers. One of the reasons customers prefer this version of RECELL is that it streamlines the workflow, mitigates the staffing shortage, and reduces the training efforts that both the customer and the AVITA team need to perform. We plan to expand the availability of our ease of use product in the upcoming quarters. With regard to the soft tissue repair market, we are prioritizing our soft tissue repair launch, given our existing codes, the overlap with Level 1 and 2 trauma centers, and our existing Burn Center customer base, and the ability to leverage and expand our current sales force. One clear upside in prioritizing soft tissue repair is that we will have immediate reimbursement. While Burns is primarily inpatient, we also have outpatient reimbursement through our transitional pass-through code with a soft tissue repair indication, where we find the majority of patients in Level 1 and 2 trauma centers being treated in the outpatient setting. Thus, we have been educating our burn customers on how to utilize these codes correctly. Further, approximately 50% of our current burn centers overlap into Level 1 and 2 trauma centers. Thus, we gained significant leverage from the sales organization as we expand in the coming year. Earlier this year, we released the top line results for our soft tissue repair trust. The study had two co-primary endpoints, one endpoint had a hypothesis of superiority for donor skin sparing and the other co-primary endpoint had a hypothesis of non-inferiority for healing, based on pairwise comparisons, where each subject receives both RECELL treatment and standard of care treatment as a study control. I’m pleased to report that both co-primary endpoints have been met for both donor sparing superiority and non-inferiority healing from RECELL and soft tissue repair. In our initial analysis, the healing endpoint for RECELL versus control did not reach pre-specified statistical non-inferiority. However, after data re-verification and associated corrections, an updated analysis has revealed that the healing endpoint has been met. Now let’s spend a few minutes on vitiligo. For those of you who might be new to AVITA, vitiligo is a chronic autoimmune disease that attacks pigment-producing cells, resulting in spots or patches of lighter or white, deep pigmented skin. Although non-threatening, it can occur anywhere on the body and can result in severe psychological denotations due to perceived disfigurement. Today, vitiligo affects up to 2% of the population worldwide, including an estimated 6.5 million Americans. In September, we announced results from a pivotal clinical trial evaluating the safety and effectiveness of the RECELL System for repigmentation of stable vitiligo lesions. We met our primary endpoint in this trial. Let me share a little bit about that endpoint. It is unique as there has never been a trial that effectively treats vitiligo with cellular transplant patient. The study compares success rates in a design where each patient randomly received RECELL treatment in one portion of the depigmented area. The study control was standard of care, narrowband ultraviolet-B phototherapy, which is the typical first-line treatment for vitiligo. Repigmentation was evaluated six months after treatment by an expert Central Review Committee. The CRC reported that 56% of RECELL treatments versus 12% of control treatments resulted in repigmentation of more than 50% of the treated area. The CRC also reported 36% of RECELL treatments versus 0% of control treatments resulted in repigmentation of at least 80% of the treated area, establishing super-superiority for the primary endpoint. We’ve had an opportunity to review this data with our medical advisors. The response was enthusiastic, particularly, because they have no treatment that achieves this result in six months. These are the first results from a US randomized controlled trial of the RECELL system in treating patients with segmental and non-segmental stable vitiligo and provide a foundation for communicating favorable clinical benefit. We intend to submit to the FDA for this indication in December of this year, with approval expected in June 2023. We’re tremendously excited about the pending submission and subsequent approval in June 2023. Going forward, we will be working with private payers and CMS to establish reimbursement for the vitiligo RECELL treatment. Currently, we believe we can achieve this by January 2025. During the interim period, we will continue to conduct vitiligo clinical research to support the ideal patient selection and treatment regimen for the broader population of vitiligo patients. The pure scale of the market and the significant benefit to these patients will be further enhanced by our automation program, which will allow for physician office treatment with the RECELL for vitiligo. We’ll keep you current with our progress on automation, clinical development and reimbursement. Finally, I’d like to take a moment to emphasize the growth drivers for 2023. First and foremost, we’re focused on accelerating growth in our burns business through greater penetration in burn centers, greater adoption by burns surgeries, and expansion of our commercial organization. Second, we’re planning a full and immediate launch into the soft tissue repair market in July 2023, following the expected FDA approval in June 2023. We plan to hit the ground running at launch with an expanded field force in place, as well as with commercial support resources and programs. Looking at this strategically, our growth in 2023 and 2024 will be driven by the penetration of the burn and soft tissue repair markets in the US, followed by the achievement of reimbursement for vitiligo for a full launch in January 2025.

Thank you, Jim. Our commercial revenue, which excludes BARDA revenue, increased by 30% or $2.1 million to $9 million in the three months ended September 30th, 2022 compared to $6.9 million in the corresponding period in the prior year. Total revenue, which includes BARDA revenue, increased 30% or $2.1 million to $9.1 million compared to $7 million. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the commencement of commercial sales with our partner COSMOTEC in Japan. Gross profit margin decreased by 2% to 83%, compared to the corresponding period in the prior year. Total operating expenses increased by 16% or $2 million to $14.2 million, compared to $12.3 million and the corresponding period in the prior year. The increase in operating expenses is attributable to higher compensation costs, pre-commercialization costs, research and development expenses, partially offset by lower share-based compensation expenses. Higher compensation costs were primarily a result of an expansion of our commercial team, along with an increase in commissions, which resulted from an increase in commercial revenues. In addition, we incurred severance costs in the current quarter associated with the termination of a former executive employee. Higher pre-commercialization costs were driven by activities related to future RECELL launches in soft tissue repair and vitiligo. Increased research and development expenses resulted from ongoing development of next-generation devices for more automated preparation of Spray-On Skin cells. Higher research and development expenses were partially offset by lower clinical trial expenses for soft tissue repair and vitiligo as trial participants were in less costly follow-up phases this period compared to more costly recruitment and treatment phases in the prior period. Share-based compensation expense was lower in the current period as certain performance milestones were met in the prior period, and there was a reversal in the current period of previously recognized expense for unvested awards related to the termination of an executive officer. Net loss decreased by 6% or $0.4 million to $5.6 million or $0.22 per share, compared to a net loss of $5.9 million or $0.24 per share in the corresponding period of the prior year. Adjusted EBITDA loss increased by 2% or $84,000 to $4 million compared to a loss of $3.9 million in the corresponding period of the prior year. A table reconciling non-GAAP measures is included in the related press release for reference. Turning to guidance, full year 2022 commercial revenue guidance is revised and increased to a range of $33 million to $34 million from $30 million excluding BARDA revenues, which represents an approximate 33% increase year over year. We continue to project BARDA revenues of approximately $0.3 million in calendar year 2022. With that, we thank you for your attention. And now, I will turn the call back over to the operator for your questions.

Hi, this is Charlie Montang on for Brooks O’Neil. Thanks for taking my questions. My first question is, how has the Fast Track designations changed the way you guys approach the soft tissue and vitiligo?

Thanks, Charlie, this is Jim. This is my first time speaking with you. The principal contribution that the designation gives us is that it calls for essentially a very dynamic and real-time review process within prioritization with the FDA that is the number one benefit that we’ll enjoy with both submissions of soft tissue and vitiligo. It also will help us later as we develop reimbursement for vitiligo. So those are the two principal benefits of that designation.

Okay, thank you. Thanks for the clarity. And then my next question is, has the hospital environment returned to normal? And if it’s not, kind of where are we and where do you think or do you see the hospital environment over this winter?

Well, overall the hospital environment has returned to a place where we have good access in terms of our selling time and very good access in terms of our support of physicians and their staff in terms of training, as well as supporting cases. So we actually are not heavily impacted by the hospital environment, we do see that there’s some staffing shortages, which causes us to have to do a little bit more training with the staff and that uses, of course, selling time to do that. But I wouldn’t characterize it as a dominant or significant challenge for us in the current time as we see it.

Okay, great. Thanks. That’s it for me.

Good afternoon, thanks for taking the question. So I just want to make sure we tease out what you’re getting from Japan versus the increase in guidance here? I think you said, Jim, $555,000 here in Q3. Are you going to get some more from COSMOTEC in Q4 as far as a bulk order? And then, I guess just to kind of wrap up the question. If it’s – I don’t know $1 million, then you have you know $2.5 million increase in the guide. So clearly the fundamentals are picking up. Can you just talk about you know what that is from in terms of share taking – sorry, penetration of existing accounts versus new accounts that you’re onboarding?

Thanks, Matt. Let me take those up in order and with respect to Japan, you’re right, the initial stocking was $555,000. And we do not yet have our clear view on this case of the launch, although there was quite a number of cases performed in the last 30 days. So we know that they’re active and they’re consuming that initial stocking order. We’re expecting that during the next quarter, we’ll get some visibility on the coming year. And when we get that, we’re going to communicate that to you and the rest of the market. The – in terms of our interest – our core business, we didn’t add very many in new accounts, because, of course, as you know, we’re in some markets up somewhere 140, 150 burn centers in the United States. So our uptick in revenue is reflective of increased penetration. So we are going to increase penetration and a broader use by surgeons. So we expect that to continue we, as part of our soft tissue repair initiative over the next six months, will be increasing the coverage profile of our Salesforce where they have time to be deeper in the accounts, which is where the action is, of course.

Got it, okay. But just to be clear, only $500,000 of the $3.5 million increase for the year is from Japan? So the $3 million is domestic?

That’s correct. $555,000.

Hi, good evening. Thanks for taking the questions. Jim and Michael, I was hoping to just ask about the data verification reanalysis of both primary endpoints for the soft tissue trial. Just any other details you can share what catalyzed the reanalysis and the data verification process? Is this standard fair? And then any help just interpreting what the new statistical significant non-inferiority result encompassed?

Sure. And actually it’s a great question. If you recall, our initial top line readout was really quite good on its own, notwithstanding, it didn’t meet the predetermined endpoint. We did what you do always in this type of study, which is to review the – you do a 100% review of the source endpoint data against the clinical database to make sure that when you submit, you have it right and subject to an FDA examination of the same data you don’t want to have any errors. During the process, two subjects were updated. One had a data entry error and one subject should have been excluded from the analysis as they had surgery to remove a medication implant that was right in the RECELL wound and interfered with the healing. So that is really just those two patients and it was really part of the standard source endpoint data review.

Now that’s helpful. Thanks for sharing those details. And just thinking about the soft tissue opportunity in front of approval, I understand there is some off-label use now you have data that supports the indication, but just not a regulatory approval. How – any help just thinking about the level of off-label use for soft tissue indication currently? And when a publication could be made that could tell us more off-label use even in the front of that July launch timeframe that you’ve provided?

Yeah, really great question. So, first of all, of course, we won’t be promoting off-label during that timeframe. One of the benefits, though we get from an early preparation of the sales team is that there are burn cases that show up in Level 1 and 2 trauma centers that are not required to be treated in a burn center. So we’ll start getting some benefit from that during, I would estimate in Q2, and again, this is one of those things that I’ll be updating you in the February conference call. But I think that we’re going to be staying focused on getting prepared for that June expected approval and the launch in July that would follow. And in the meantime, we’ll be training our organization getting them ready; they’ll have the opportunity in those other centers to pick up some additional sales from the burn that enter Level 1 and Level 2 trauma center. So, I think that’s the best characterization I can come to at this moment.

Hi, thanks. Thanks for taking my question. I just wanted to kick you know you’ve obviously with RECELL and burns you obviously been able to build out a pretty successful sales force and generate pretty good productivity there. I’m not sure if this was mentioned, but just wanting to understand what your expectations are for the sales force going forward and then expanding that as soft tissue and potentially vitiligo down the line you know become commercial, understanding that I believe the Salesforce it’s around 30 at the moment?

Yes, again, good question. I’ll break it into a few pieces, if you don’t mind. So, the field force is around 30, which includes both field support for cases as well as direct salespeople. And so you’re approximately right in that particular number. The opportunity in soft tissue is, you know, as I mentioned, in the order of 3x larger than that with burns, both in call points, hospitals and the market size. And so, to really get after that, it’s necessary to invest in a sales expansion that will at least cover the large volume centers throughout the United States, which we will be doing. And as I mentioned earlier, I’ll characterize that I think in a little bit more detail in the Q1 – the call that we do in February. It’s not a Q1 call, actually that’s end of the year, if you’re trying to call. So, I think you’ll see that investment characterized at that time and our current early thinking is that we will be having those next investment become so to speak reality during the Q2 period. And we will provide some further guidance on that. Did I get to all your questions? Well, thank you very much. We’re really feeling very excited about the progress we made this quarter. And we’re looking forward further to our submissions of for vitiligo and soft tissue here in December in the next month or so. So this is really setting the pace for our increased rate of growth that we expect in 2023 and 2024. And I’m looking forward to sharing that with you in the February call. So thank you all for attending. And I look forward to speaking with you more at that time.