Good day and thank you for standing by. Welcome to AVITA Medical Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Caroline Corner. Please go ahead.

Thank you, operator. Welcome to AVITA Medical fourth quarter 2022 earnings call. Before we begin, let me remind you that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding the markets in which AVITA Medical operates, trends, demand and expectations for its products and technology, its expected financial performance, expenses and position in the market. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by the forward-looking statements. Please review AVITA Medical’s most recent filings with the SEC, particularly the risk described in AVITA Medical’s annual report on Form 10-K for the year ended December 31, 2022, for additional information. Any forward-looking statements provided during this call, including projections for future performance, are based on management’s expectations as of today. AVITA Medical undertakes no obligation to update these statements, except as required by applicable law. AVITA Medical’s press release for fourth quarter 2022 results is available on its website under the Investors section and includes additional details about its financial results. AVITA Medical’s website also has the latest SEC filings, which you’re encouraged to review. Recording of today’s call will be available on AVITA Medical’s website by 5:00 PM Pacific Time today. Joining me on today’s call are Jim Corbett, Chief Executive Officer; and Sean Ekins, Acting Chief Financial Officer. I'll now turn the call over to Jim for his comments.

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us today. I will begin today's call by discussing highlights for the fourth quarter and full year as well as our expectations and guidance for 2023. Sean will then provide more detailed commentary on our financial performance before opening the call to Q&A. To begin with, we had a strong top line commercial revenue performance with $9.4 million in Q4 2022, which is a 37% increase over the same period in the prior year. For the full year 2022, our commercial revenue was $34.1 million, which was a 36% increase over the prior year. As a reminder, commercial revenue includes all global revenue and excludes the $100,000 BARDA revenue recognized in the quarter and $400,000 for the year. I'd like to personally congratulate our field sales team for their successful 2022. I'd like to provide an update on the initial priorities I discussed on our third quarter call. With respect to our two pending applications with the FDA, our PMA supplement for soft tissue was submitted on the 9th of December and our PMA application for vitiligo was submitted on the 16th. Both submissions independently have breakthrough device designation. As such, we have expedited review for both programs, which have each met or exceeded the primary endpoints in their respective studies used to support the applications. The 180-day review cycle would imply June approvals. Notably, the soft tissue PMA supplement will significantly broaden our existing burns market and allow us to leverage our existing burns infrastructure. Our team has developed the commercial plans to maximize the soft tissue opportunity and to drive synergies between burns and soft tissue repair, which will drive our growth over the next three-plus years. These synergies are significant and important. First, soft tissue repair utilizes the same inpatient reimbursement and outpatient codes as burns. As such, both in-hospital reimbursement through a DRG and outpatient reimbursement through a transitional pass-through code will be effective immediately upon FDA approval for soft tissue indications. Second, nearly 150 burn centers that we are presently approved to sell in approximately half are also either Level 1 or Level 2 trauma centers, which means that these hospitals will have immediate access to the expanded label upon approval. Additionally, we will be adding approximately 1,000 hospital call points that are Level 1 and Level 2 trauma centers to our current 150 or so hospital call points. Third, within the US inpatient burn market, we are configured to only call on the US burn centers where 70% of the RECELL eligible cases are treated. The expansion into Level 1 and Level 2 trauma centers positions our sales force to capture the remaining 30% of the burn market. In the second quarter, we will begin calling on these trauma centers. We will use this opportunity to begin promoting RECELL for burns in these Level 1 and Level 2 trauma centers and begin seeking value analysis committee approval that will allow for a more rapid soft tissue repair launch in July. Together, these synergies offer us the unique opportunity to prepare for the full commercial launch of soft tissue on July 1, 2023, as we should have immediate access to our expanded indications and approvals in many of these hospitals already upon PMA supplement approval. Further, during the second quarter, we will initiate the planned expansion of our US field sales organization. Currently, we have 30 field salespeople that we will be expanding to approximately 70 field salespeople, which includes both direct sales and clinical roles. This is ahead of the expected June approval of our PMA supplement for soft tissue repair so that the team is in place and trained at launch. This will result in a peak operating expense as a percent of revenue in Q3 2023. I emphasize that our contribution margin on new field sales professionals is breakeven with approximately five RECELL kits sold per month per individual. Currently, the average productivity of a direct sales rep exceeds 20 kits per month. This is what I like to call weaponizing our gross profit to enhance market adoption and penetration where the sales force expansion pays for itself quickly. For the Vitiligo indication, we expect PMA approval in June 2023 as well. We are in process of pursuing in-office reimbursement through the AMA CPT code process. It is our goal to secure Medicare reimbursement by January 2025. During the interim period, we will be implementing cash pay for Vitiligo patients and physician-sponsored studies to build our podium presence for an intended commercial launch in January 2025. During our last call, I also committed to providing an update on our automation program. By way of background, currently the disaggregation of cells from the autologous sample is done manually and requires frequent training by our field sales team. Our automation device is designed to automate that disaggregation, which will require less training by our sales team and operating room staff and will allow us to better leverage selling time by our field organization. We plan to submit our PMA supplement application to the FDA by June 30 of this year. Just like with soft tissue, we will be subject to the 180-day review cycle, and we have projected approval by January 2024. As reported in Q4, we have begun our launch in Japan through our partner, COSMOTEC. Early returns are very positive. These sales are recognized in US dollars, and we will report Japan revenues in our footnotes in the foreign revenue line. During 2023, we expect that Japan will account for over 90% of those international revenues. With respect to our broader international strategy, it remains on our agenda to communicate our strategy during the November Q3 earnings call. Regarding 2023 guidance, as communicated, we will be providing updated annual and quarterly guidance every quarter. Our annual revenue guidance for 2023 is expected to be in the range of $49 million to $51 million, which would be at the midpoint of guidance, representing a 47% growth over 2022. For the first quarter of 2023, we expect commercial revenues to be between $10 million and $11 million. At the midpoint of this guidance, we would be up over 40% over the prior year. As I have outlined, 2023 will be the year of inflection for AVITA Medical, transforming our business to encompass multiple indications and dramatically expanding our growth trajectory. Our regulatory and commercial teams are making great strides, and I look forward to updating you on our progress in future calls.

Thank you, Jim. In the three months ended December 31, 2022, our commercial revenue, which excludes BARDA revenue, increased by 37% to $9.4 million, compared to $6.8 million in the same period in 2021. Total revenue, which includes BARDA revenue, increased by 36% to $9.5 million, compared to $6.9 million in the same period in 2021. Gross profit margin was 86%, compared to 88% for the fourth quarter of 2021. Total operating expenses for the quarter increased by 2% to $15 million, compared to $14.8 million in the same period in 2021. The increase in operating expenses is attributable to increased selling expenses, pre-commercialization costs, and salaries and benefits, partially offset by lower research and development and share-based compensation expenses. Higher selling costs are attributable to increased commissions, travel costs, and training events associated with increased sales activity. Increased pre-commercialization costs are driven by activities related to future resale launches in soft tissue repair and vitiligo. Higher salaries and benefits are driven by the expansion of our workforce to support the overall operation. Research and development costs were lower due to the following: the pediatric burn study was closed for enrollment. Soft tissue repair and vitiligo trial participants were in less costly follow-up phases this period, compared to more costly recruitment and treatment phases in the prior period, along with lower expenses for sponsored research agreements toward pipeline development. In addition, we had lower development expenses in the current year from ongoing development of next-generation devices for automated preparation of Spray-On Skin cells, as we are currently in a lower-cost project phase compared to the prior year. Share-based compensation expenses were lower due to a reversal in the current period of a previously recognized expense for unvested awards related to the termination of a former Executive Officer. Net loss decreased by 37% to $5.4 million or $0.21 per share compared to a net loss of $8.5 million or $0.34 per share in the same period in 2021. Adjusted EBITDA loss decreased by 39% to $4 million compared to a loss of $6.5 million in the same period in 2021. For the full year ended December 31, 2022, our commercial revenue increased by 36% to $34.1 million compared to $25.1 million in the same period in 2021. 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. Total revenue increased by 4% to $34.4 million compared to $33 million in the same period in 2021. Gross profit margin was 82% relatively flat compared to the same period in 2021. Total operating expenses increased by 10% to $59.1 million compared to $53.6 million in the same period in 2021. The increase in operating expenses is attributable to higher salaries and benefits, pre-commercialization costs, selling costs, share-based compensation expenses, partially offset by lower research and development expenses. Higher salaries and benefits were primarily a result of the expansion of our commercial team, along with an increase in our workforce to support the overall operations. In addition, we incurred severance costs in the current year associated with the termination of a former Executive Officer. Higher pre-commercialization costs are driven by activities related to future product launches in soft tissue repair and vitiligo. Higher selling costs are attributable to increased commissions, travel costs, and training events due to increased sales activity. Share-based compensation expenses were higher in the current year driven by new equity grants, partially offset by a reversal of a previously recognized expense from vested awards related to the termination of a former Executive Officer. Research and development costs were lower due to the following: the pediatric burn study was closed for enrollment, soft tissue repair and vitiligo trial participants were in less costly follow-up phases in this period compared to more costly recruitment and treatment phases in the prior period, and a lower expense for sponsored research towards pipeline development in the current period. This is partially offset by higher development expenses in the current year from ongoing development of next-generation devices for automated preparation of Spray-On Skin sales, as compared to the prior year due to early prototype development and testing. The net loss was $26.7 million or $1.07 per share, compared to a net loss of $25.1 million or $1.03 per share in the same period in 2021. Adjusted EBITDA loss was $19 million, compared to a loss of $18.1 million in the same period in 2021. A table reconciling non-GAAP measures is included in today's press release for reference. With that, we thank you for your time. And now I'll turn the call back to the operator for your questions.

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Joshua Jennings of Cowen. Your line is now open.

Thank you. Good afternoon. Congratulations on the strong finish and the confidence in the outlook and the call for inflection in 2023, Jim and Sean. One was hoping to ask about guidance for the full year and first quarter to start. And if there’s any way you can maybe help us think through your outlook for the core burn business, RECELL burn business and the growth you anticipate and then maybe any assumptions for soft tissue contributions for the full year. And then for the first quarter, just it's a nice sequential step up. If you can just remind us about seasonality trends in the burn market in the United States. And is there some seasonality tailwinds, or is this just momentum from Q4 carrying into these first two months of 2023 already and giving the counter-strict issue that nice sequential step up in Q1? And I would follow up.

Thanks, Josh. That was a very distinct single question. Let me take it on. I'm just teasing. So first of all with regard to the burn business, let's start with that. We saw sequential growth Q4 to Q1 clearly. And that does not reflect seasonality. I'll just give you some data. And if you look at claims data for the last three years by quarter contribution to the year and you average them, the average burn admits that are RECELL eligible sound like this: 25, 25, 26, 24. So there are very minor changes between Q4 and Q3, and it’s one point in terms of annual admits. So there's really not a seasonality reality that we can define from the claims data. So what we're therefore seeing is growth and penetration. So that's the first element I think to your question. What we expect to see throughout the course of the year Q1 and Q2 is continued adoption and the number of users who use it multiple times per month increasing. As the evidence continues to grow, the experience with burn surgeons continues to get validated in terms of tissue sparing and healing and early exit from the hospital. That's really taking its own course, and our field sales team has done a really terrific job. What happens as we move and I'm staying on burns for a second, into the second half depending on your math, 30% of the burns market, which is about 10,000 of the 35,000 admits are in soft tissue repair. And they are in, excuse me, one-third of them are in level one and two trauma centers okay? That 10,000 cases we have not been comparing to call on. So one of our expectations as we move through the year is that adoption will come our way because of course, our sales team will be calling on those physicians with the very strong accumulated evidence and commercial experience we've had focusing only on burn centers. So that's a really big driver for the year in the burns market. We're feeling increasingly comfortable with our soft tissue repair PMA supplement in terms of timing. We're having a very productive interaction with the FDA. We're not getting surprises of any type. As you know, we are on the Breakthrough Device designation path. And that is, of course, giving us expedited review and we don't stop the clock unless there's a material deficiency. So that has caused us to bet, so to speak, on that June approval and July 1 readiness. So with that readiness, during Q2, we're expanding, as I mentioned, our field force from approximately 30 to 70. So during the second half, we'll build increasing momentum in soft tissue repair. It will have a curve associated with it. For example, we will have soft tissue repair indication available and VAC approved in virtually half of the burn centers which are Level 1 and Level 2 qualified. We'll also begin the VAC process during Q2 in a number of Level 1 and 2 trauma centers using burns as our indication for that process. A bit uncertain at the moment exactly how many we'll get through VAC during Q2, but certainly will have a running start. And our sales team will be fully in place and trained for that July 1 launch. So we'll scale up during the second half in soft tissue. And of course, what will really be exciting, quite honestly, is our exit rate in Q4, because it's going to really position us for high growth in 2024.

Thanks for walking us through that. I appreciate it. And just a follow-up on the build-out of the sales team. Just was hoping to better understand and where you're recruiting these reps from? And are there any challenges to getting to that 70 number in Q2, or do you feel like that's a pretty straight shot based on experience to date? Thanks again for taking the questions.

Thanks, Josh. It is a qualitative evaluation on my part, but I don't mind sharing it. First of all, we have a very strong pipeline of candidates. I think the success that AVITA has been experiencing in the marketplace translates well into the expanding indications that we have and that are coming. That translates well in terms of recruiting. The fact that we are well capitalized and have the capital to execute a growth strategy is very appreciated, because a lot of companies don't have that. So our early returns are that we've largely filled the management roles that we're expanding into or have identified them. We've begun interviewing the salespeople, and we have a great pipeline of really high-quality candidates. They're coming from a number of places, but they come from related wound care companies. They come from a MedSurg type background. So we want salespeople who are experienced and comfortable in the OR, and we're finding really a strong pipeline of candidates. So, we're quite confident that we're going to get our team in place and have adequate time to train them. It is a big scale-up for us. And our commercial team is really stepping into this one, so it's really kind of inspiring to watch them do it.

Thank you. Our next question comes from the line of Phillip Dantoin of Piper. Your line is now open.

Hey. This is Phil on for Matt. Thanks for taking our questions and congratulations on the excellent quarter. I guess, just for starters given the expected inflection here in 2023 and your commentary how durable do you see this call it 45% growth in the 2024, 2025 timeframe? And is it wrong to say that you're exiting 2023 at nearly 50% growth? Thanks.

Yes. Thanks, Philip. First, at midpoint it's 47% not 45%, just to make a fine point of it. I think that implies a greater than 50% exit rate in Q4. You're correct. So how durable do I think it is? I think it's quite durable. The exit rate will cause us to have to expand more into 2024 as well in terms of our commercial coverage. So I think we have some very strong growth years ahead of us with soft tissue and burns on their own not adding to either an international expansion or a launch of the vitiligo in January 2025.

That's really helpful. And I guess one more for me. On spend given the rapid increase in the sales force here in Q2 what cash burn expected to look like? And how do you think about capitalization moving forward? I appreciate the commentary that OpEx should keep in Q3 but what should we be thinking about there?

Well, clearly, we're making an investment in market growth. Now go back to our 83% gross profit and how we look at each of those investments. Contribution margin for a sales rep gets covered by five resale sales a month. So for us that is from a looking at our burns experience, each rep averages well over 20 per month. So we do have an expectation about when they cross over and it is – without getting precise about it because it does have variability it's a number of months, not a year that they will cross over. So I think from a cash burn point of view, we feel quite comfortable. For example, we're absent investments in Vitiligo or international. We expect to end 2024 with an excess of $30 million of cash. So that will be after another expansion and another growth year. So we feel very comfortable with our capital position as it is today.

Thank you. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

This is Saib on for Ryan. This next one is on the Japanese market and the partnership with COSMOTEC. Do you expect meaningful contributions from the Japanese market in 2023? And how should we think about that given the guidance you've provided? Then I have a follow-up as well. Thank you.

Well, first of all, our early returns in Japan are going well. We've performed in the territory of in excess of hundreds of patients so far. That said, we do not have enough experience with them that we're giving specific guidance on Japan, although you'll note that it is even at a couple of hundred in the short time it's been we do expect a strong performance from Japan remembering that we recognized 40% of the selling price. So on one hand it's a very high gross – high operating profit type sale. It's also lower per case in revenue but lower expense to produce. So I think in the coming quarter, my objective in my conversations with COSMOTEC is to be in a place where we can project forward our expectations for Japan. We're just not quite ready to express that in this moment.

Thank you. That's very helpful. The next one is on Vitiligo. You indicated that Vitiligo is likely to still be approved in June of 2023 with insurance reimbursement established in January of 2025. Can you provide us with any updates on conversations you've had with insurance payers as you look to establish reimbursement for Vitiligo? Thank you, again.

Yeah. You bet. Actually, we've had no formal conversations with payers at this time. They of course dedicate their time to products that are ready for market and we are still a few months away from that. Our expectation is of course that what we're looking for is to establish RECELL as an in-office treatment alternative. So that is a process that is embedded in sort of the reimbursement world. So it's kind of a complex question to answer. We haven't gone to private insurers yet, will in fact go to CMS first. So that will all happen post-later this year.

Thank you. Please stand by for our next caller or question. Our next question comes from the line of Brooks O'Neil of Lake Street Capital Markets. Your line is now open.

Well. Thank you. Good afternoon, everyone. I was hoping you might talk a little bit about what your expectations are with regard to the dynamics in the soft tissue market, relative to your experience with large burns in terms of kind of number of cases that RECELL might be appropriate for, let's say, per week or per month in the centers you're going to attack. And how many kits per case. Some of those things would help us to get a good feel for sort of how you view the opportunity in soft tissue.

Thank you, Brooks. Let me address your questions. First, in soft tissue repair and reconstruction, we expect that cases will use fewer RECELL kits per patient compared to large burns, where multiple kits may be required. Secondly, the number of patients who can be treated is approximately four times higher for soft tissue than for burns, representing a significant increase. There will be various applications available under this broader indication. For instance, in a Level 1 trauma center, we can expect a diverse range of patients, including those with smaller burns that still require treatment, as well as those with necrotizing bacteria, degloving, abrasions, and acute wounds. This opens up a considerable market opportunity, but it also necessitates extensive training and focus for our sales team. We will be shifting our attention from larger accounts to smaller ones. This strategy allows us to access a wide range of indications while we prepare our automation submission for FDA approval. By January 2024, when we begin targeting smaller Level 1 and 2 trauma centers, we anticipate launching and enhancing our automation program. This ongoing evolution will enable us to secure VAC approvals and tap into these broader indications, ultimately making our sales team significantly more productive through automation.

That's really helpful. I have one more question. I'm intrigued by your comments about reaching breakeven with five kits per month, though I might have misheard that, as the average being 20 kits. Do you anticipate that the dynamics in soft tissue will be similar in terms of an average salesperson selling 20 kits, or do you think they could sell significantly more? What are your expectations for how quickly individuals will reach or exceed the average?

Okay. Perfect. So for clarification, the metric I used was contribution margin for the cost of a rep is equivalent approximately to five RECELL kits. And that our current sales reps in burns-only are averaging in excess of 20. So just as baseline, that's where we are. So first question is, do we expect that five to be the same for our expanded sales organization? The answer is, yes. It'll be the same. You’re selling virtually the same kit that is sold at the same price. Therefore, we manufacture it for the same. So the 83% gross profit works still in that equation. Do we think that the market opportunity to be greater than 20 per month exists? Actually very much so. We expect that the potential is quite higher than that because of course, the market cases, the patients that we are treating are approximately 4 times the number that are in burn. So we think that opportunity is really rich. Now we have to execute, but that's a big opportunity for us. I think I got all your questions or did I miss one?

No, you did, Jim. Thanks a lot. And it's a pretty exciting opportunity and I can't wait to see it unfold.

Thank you. Our next question comes from the line of Lyanne Harrison of Bank of America. Your line is now open.

Hi, good afternoon, all. Just a follow up on Brooks' question. I have one more on that. In terms of the ramp-up rate it takes for a salesperson to get from zero to five kits a month and then from five kits a month to 20 kits a month, what does that profile look like for the purposes of us looking at what the ramp-up might be for soft tissue?

Yes, Lyanne, it's a really terrific question. We do have data on that. It's fairly variable. But on the front end of it is less than half a year. And on the longer end, it's well under a year. So it's variable, but we know its months. We know it's not years. So they pass that five pretty consistently in a short number of months, and then they get more work. In fact when we were launching with burns it was actually harder. We were less proven at that time, and the market was narrower in terms of the indication we were pursuing. So we actually are very optimistic about the equation that you're describing. I'd like to give you a more precise answer, but I can suffice to say it’s months, not a year. And I think that's probably as tight as I can make that interval at the moment.

That's very helpful. And then just a follow-up question on gross margins. So obviously, seeing slightly gross margin slightly down this quarter, but over time it's expanded significantly as volume increased. Do you have an expectation on target gross margin or where you might end up at the end of financial 2023?

Yes. Our gross margin does fluctuate. We don't face price competition, but we have volume-related discounts that become important, especially toward the end of the year. This is one aspect. Recently, we have made noteworthy improvements in our manufacturing process. Specifically, we eliminated the need for cold chain shipping, which involves packaging to maintain temperature. In the past few months, we've gathered data that allows us to forgo that shipping method, resulting in significant cost reductions that will benefit us moving forward. We are confident about two things: the improvement in our cost of goods and the stability of our average selling price, which mainly depends on volume discounts rather than price competition.

Thank you very much. That's all I have.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thank you very much.

Thank you very much.