AVITA Medical, Inc. Q4 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the AVITA Medical Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Jessica Ekeberg, Director of Investor Relations.

Thank you, operator. Welcome to AVITA Medical's fourth quarter and full year 2023 earnings call. Joining me on today's call are Jim Corbett, Chief Executive Officer, and David O'Toole, Chief Financial Officer. Today's earnings release is available on our website, www.avitamedical.com under the Investor Relations section. 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. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements. Please review our most recent filings with the SEC, specifically the risk factors described within the Form 10-K for the year ended December 31st, 2023, for additional information. Any forward-looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Jim for his comments.

Thank you, Jessica. Good afternoon and thank you for joining us today. I will begin today's call by discussing our financial and business highlights of the fourth quarter and full year 2023, followed by an update on our priorities for 2024. Following this update, I will turn the call over to David, who will provide commentary on our 2023 financial performance and the 2024 guidance before opening the call to Q&A. During the February 2023 conference call, I outlined our 2023 priorities, our growth strategy and committed to providing quarterly and annual guidance. Additionally, I emphasized that 2023 would mark a significant turning point for AVITA Medical, a year in which we planned to transform our business by entering into multiple new indications and dramatically increasing our growth trajectory. I'm pleased to report we did just that. We finished 2023 strong, delivering fourth quarter commercial revenue of $14.1 million, representing growth of 50% over the same period in 2022. This performance highlights our sustained quarterly growth trajectory. For the full year of 2023, we closed with commercial revenue of $49.8 million, representing impressive growth of 46% over the prior year. This is a significant achievement reflecting the effectiveness of our strategic growth initiatives and initial launch of full thickness skin defects, which I will address shortly. Shifting focus to our recent developments, on January 10th, we announced that we entered into an exclusive five-year distribution agreement with Stedical Medical to commercialize PermeaDerm biosynthetic wound matrix in the United States. PermeaDerm is a transparent, flexible dressing that is cleared by the FDA for use in the treatment of a wide range of wound types until healing is achieved. PermeaDerm's high level of permeability and flexibility allows medical professionals to stretch it, giving clinicians the ability to customize the porosity to meet the specific needs of the wound. This adjustability facilitates wound healing. Moreover, PermeaDerm can be used alongside the treatment of many of our burn and full thickness skin defect cases to further aid in healing. The complementary nature of these two products and overlapping call points allow us to leverage our commercial organization to effectively integrate PermeaDerm into our selling portfolio. Our commercial organization will launch PermeaDerm during March, and we will update you on this effort during our first quarter call after we have had some experience selling to our customers. The partnership marks the first step in our efforts aimed at expanding our portfolio of wound care products that will facilitate wound treatment. Moving on to our international expansion strategy. Last quarter, I unveiled our plans to expand into Australia and most of the European Union through third-party distribution partnerships. I'm happy to report that PolyMedics, our first European distributor, completed their resell training and launched within Germany, Austria, and Switzerland in January as expected. We will continue to update you as we identify new distributor partnerships. Turning to the PMA supplement for RECELL GO, we have completed the in-house testing that was necessary to fulfill the FDA's request for additional information. As previously stated, we expect to submit our response to the FDA on February 28, 2024. With the restart of the 180-day real-time review, we plan to launch on May 31, 2024. Moving on to the manufacturing and assembly of RECELL GO. We mentioned during our last call that we made the strategic decision to bring the entire manufacturing and assembly process of both the durable and disposable components in-house to our Ventura facility. We will also be completing a service center for the durable that will be located in Ventura. We are on track to complete this transfer ahead of the May 31st launch of RECELL GO. As part of the in-sourcing process, we have been renovating our Ventura facility to increase capacity by 10-fold. This expansion will also facilitate PermeaDerm distribution. With our Ventura facility serving as the hub for housing and distributing PermeaDerm to our customers, along with our other products. As a result of this expansion, we will have ample space for manufacturing and assembly as well as physical distribution, ensuring efficient operations for the next five years of operation. These renovations are being completed in phases throughout 2024 with the final phase scheduled for completion during the third quarter. While we work to enhance our operational capabilities to fuel our growth, we are also focused on the next expansion of our commercial field organization. Our primary objective during our first commercial organization expansion, which occurred in the early half of 2023, was aligning our sales strategy with our overall growth strategy by focusing on adoption and new cases for our new indication of full-thickness skin defects. To achieve this, we strategically increased our sales team from 30 to 70 people in our territories from 14 to 40 to maintain small sales territories and keep our growth rate high. Specifically, we aimed for our 40 territories to average under $2 million to facilitate effective coverage penetration and growth. We should be approaching the $2 million threshold during the latter half of 2024. Therefore, our plan is to expand our sales force and territories again to keep the focus on adoption and growth. Moreover, an expanded sales force will allow us to intensify our efforts in the value analysis committee process, thereby maximizing our ability to capitalize on the expanded label of full-thickness skin defects. Consequently, we are adding 38 new positions to our commercial organization, which will bring our total to 108. We expect our expanded field team to be in place by April 1st. With our current commercial field organization and our expanded sales force, we expect to add approximately 200 new accounts during 2024. As we discussed during our third quarter call, the broadened scope of full-thickness skin defects provides us with an opportunity to pursue many different applications for RECELL. As part of this pursuit, we must access multiple physician specialties within a single facility to gain Value Analysis Committee approval, resulting in a lengthier sales process. We continue to affirm this expanded indication increases the patient population of RECELL by 10 times over the patient opportunity with burns. In line with the expanded label of full-thickness skin defects, we are in the design stage of developing RECELL GO mini. RECELL GO mini is being designed to address smaller wounds, providing us with the opportunity to treat patients with less than 5% total body surface area affected. This device will have the same reusable aspect as RECELL GO, with a different cartridge that accommodates a smaller donor skin sample. We intend to submit a PMA supplement in order to achieve FDA approval by year-end. Now, turning to the vitiligo initiative. In January, we completed enrollment of 109 patients in TONE, our post-market study, evaluating re-pigmentation and its impact on the quality of life for vitiligo patients earlier than anticipated. Our initial six-month follow-up assessments are scheduled to begin in July. To strengthen the data that we are collecting, we have extended the follow-up period to include an additional assessment at 12 months post treatment. We expect to submit both this study and our separate health economic study for publication by the end of 2024. These study dates position us to begin commercial payer coverage discussions during the second quarter of 2025. Subsequently, we anticipate a phased rollout of commercial coverage on a regional basis with the initial phase likely to begin in the fourth quarter of 2025, supported by an appropriately sized commercial organization as coverage is established throughout the United States. Before turning the call over to David, I would like to address our financial outlook. I previously committed to communicating the quarter in which we achieved cash flow breakeven and GAAP profitability. We are pleased to report that we have established a path to achieve both milestones no later than the third quarter of 2025. In closing, 2023 marked an exciting inflection point for us, and our dedication to innovation and growth continues. We remain resolute in our commitment to unlocking shareholder value through increased adoption and sustained growth within our indications and expansion of our portfolio. I look forward to sharing further updates on our continued progress. With that, I'd like to turn the call over to David.

Thank you, Jim. We continue to deliver strong financial results. In the three months ended December 31st, 2023, our commercial revenue increased to $14.1 million, $4.7 million more than the $9.4 million in the same period in 2022. Since Q1 of 2023, we have demonstrated sustained impressive commercial revenue growth rates of 40%, 42%, 51%, concluding the year with a Q4 growth of 50% compared to the same quarter in the prior year. Our strong third and fourth quarter results were largely driven by three key factors. First, we were able to capitalize on our pre-existing burn center accounts, of which half also have trauma centers, enabling us to immediately market full-thickness skin defects in those centers, thus boosting sales. Second, we have received VAC approval on a number of new accounts. And lastly, we continue to benefit from increased adoption in the burns market. Gross profit margin for the quarter was 87.3% compared to 86% in the same period in 2022. This significant increase in gross margin was driven by the increase in sales and production of our products. As we have discussed previously, as production and sales increase, we benefit from the fact that approximately 50% of our cost of goods sold is fixed, representing the cost of the facility in Ventura. Total operating expenses for the quarter were $24.7 million compared to $15 million in the same period in 2022. The increase in operating expenses is primarily attributable to an increase of $2.4 million in G&A expenses related to stock-based compensation, consulting expenses and employee-related costs. Additionally, we incurred an increase of $3.4 million in R&D costs, which was primarily due to employee compensation costs, including recruiting costs, accelerated recruitment and third-party costs associated with the TONE study and costs associated with in-sourcing RECELL GO production to our Ventura facility. Lastly, sales and marketing expense increased by $3.9 million, primarily due to employee-related costs, including commissions, travel, and promotion expense as a result of the expansion of our commercial organization in the second quarter of 2023. For the full year ended December 31st, 2023, our commercial revenue increased by 46% to $49.8 million compared to $34.1 million in the same period in 2022. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the launch of full-thickness skin defects through our expanded commercial team. The gross profit margin for the full year was 84.5% compared to 82% in 2022. The gross profit margin for the year was at the higher end of our full year guidance of 83% to 85%. Total operating expenses were $86.4 million compared to $59.1 million in the same period in 2022. The increase in operating expenses is largely attributable to an increase of $15.4 million in sales and marketing costs as a result of the expansion of our commercial organization in the first half of 2023. Alongside this expansion, G&A costs increased by $5 million due to the increased headcount and related salaries and benefits, stock-based compensation, consulting fees, and recruiting costs. Lastly, R&D costs increased by $6.9 million, primarily driven by the cost of the TONE study, final work and completion of the PMA supplement to the FDA in June of 2023 for RECELL GO and employee-related costs, including stock-based compensation. Net loss for the fourth quarter was $7.1 million or a loss of $0.28 per share compared to a net loss of $5.4 million or a loss of $0.21 per share in the same period in 2022. Net loss for the full year 2023 was $35.4 million or a loss of $1.40 per share compared to a net loss of $26.7 million or a loss of $1.07 per share in the full year 2022. As of December 31st, we had cash, cash equivalents, and marketable securities of $89.1 million compared to $86.3 million as of December 31st, 2022. During our third quarter conference call, I discussed the credit agreement we entered into with OrbiMed on October 18th. As a reminder, $40 million of the total $90 million debt facility was funded at closing. As we have discussed previously, we do not foresee a need for either of the remaining $25 million tranches before they expire at the end of this year. With our current cash balance of $89.1 million as of December 31st and our expectations of reaching cash flow breakeven no later than the third quarter of 2025, we are confident that we have sufficient cash reserves to achieve our goals. Turning now to our 2024 guidance. For the first quarter of 2024, we expect commercial revenues to be in the range of $14.8 million to $15.6 million. This reflects a growth rate between 42% and 50% over the same period in 2023. Our annual revenue guidance for 2024 is expected to be in the range of $78.5 million to $84.5 million, which would reflect growth between 57% and 69% compared to the full year 2023. Lastly, during the fourth quarter, we made the decision to reorganize our corporate structure and wind down our legacy foreign subsidiaries to improve the efficiency of our operating and reporting structure. Due to the limited business operations of the foreign subsidiaries, the net impact of the restructuring was a $9.4 million foreign exchange gain or previously deferred unrealized cumulative translation adjustments in equity. This $9.4 million noncash gain was recorded in other income expense on the statement of operations. We expect the restructuring to be completed no later than the third quarter of this year, at which point our primary operating company, AVITA Medical Americas LLC, will be a wholly owned subsidiary of AVITA Medical, Inc., and no foreign subsidiaries will exist. With that, we thank you for joining us. And now I will turn the call back to the operator for your questions.

Thank you. Our first question comes from Brooks O'Neil with Lake Street Capital Markets. You may proceed.

Good afternoon, guys. Congratulations on the terrific progress. I have a couple of questions. I guess, first, I would love to get any color you can offer about the experience you're having with the hospitals backs? And then maybe you could just tell us a little bit about the experience you see if you get back approval, getting procedures performed by the surgeons in those hospitals?

Hey, Brooks, thanks very much. So first, let me describe the experience we're having. Broadly speaking, we have well over 100 hospitals in some stage of the back process. What we're experiencing is frankly a longer cycle time related to the broader label. In most cases, we're needing to involve three or four physician specialties and as many as ten different indications, and of course, there are commensurate DRG or reimbursement involved. The complexity has, unfortunately, it's a little bit like a wave coming ashore. There's a lot of them, and we've been at it now for two quarters. So they are starting to progress. It's a good metaphor because everybody is happy when that happens. But the experience we're having is that it requires a more intense selling process. One of the reasons we expanded our sales team during the year was to capitalize on real-time opportunities related to the broader label. On a patient level, we have 35,000 RECELL-eligible burn patients, but nearly 400,000 RECELL-eligible full-thickness skin defect patients. Penetrating these hospitals is crucial for us. We're gaining experience in cases that we haven't seen treated before and are achieving very good clinical results. So, we're really feeling good about the progress we're making. We expect to add approximately 200 new accounts during the year.

Great, that's very helpful. So perhaps we could just talk a little bit about any progress you feel you're making capturing some of the incremental burn activity within the Level 1 and Level 2 trauma centers you're beginning to call on?

Well, certainly, we are. That's our lead clinical data and our lead clinical experience commercially over the last few years. We find them in the Level 1 trauma centers, and the physicians typically are well aware of RECELL because they go to burn meetings. They just were not reached by our sales coverage model in prior years. So, we're making progress in those instances, and there is much more to achieve as you can imagine because that VAC approval process becomes more complex as I was describing earlier. But we are seeing those cases.

Great. Let me just ask one more. I appreciate all the color. Obviously, last year you had a substantial expansion of the sales force and now we're embarking on a second expansion. Can you just talk a little bit about your experience with the first expansion and your confidence that you can find the right people to complete the second expansion?

Well, I can tell you, on January 18th, I was at our national sales meeting in Dallas, where we celebrated and did the very common awards for the sales team. What was really impressive is how many of them have become successful and have great momentum in their territories. Our experience has been that we have the ability to really make the expansion happen rapidly because we are growing and we have a proprietary technology that creates a special opportunity for sales reps. We initiated the sales expansion after that national sales meeting and expect to complete hiring by the end of March. This is an indicator of the demand that exists in the marketplace for positions at AVITA.

That's fantastic. Thanks for the color, and congratulations on the terrific results.

Thanks, Brooks.

Thank you. One moment for questions. Our next question comes from Josh Jennings with TD Cowen. You may proceed.

Hi. This is Eric on for Josh. With guidance for 2024, could you help us understand what you're assuming for some of your different growth opportunities here? I'm thinking the launch of full thickness and RECELL GO. How much of the growth in 2024 will these opportunities account for?

First of all, our guidance anticipates growth of between 57% and 69%, which is substantial. RECELL GO will essentially replace the RECELL manual system, so it's not very easy to separate them because RECELL GO will not create a sales dollar by itself. The disposable that goes with it will replace the RECELL kit. From an assumption point of view, it is really driven by market penetration into full-thickness skin defects. That is the significant growth area. We continue to gain share in the core burns business, but in time, that will become the minority of our total business relative to full thickness skin defects. When we expect to add approximately 200 new accounts during the year, the majority of those will be in the full thickness skin defect cases. So that's the real driver.

That is. Yes. Thank you for the color. And then maybe thinking internationally, should we expect contributions from Europe and your distribution partners there? Is that a real driver for 2024? Or is that something that might take a little bit more time and maybe we should be thinking of 2025?

Regarding international, we signed our first European distributor, which is covering the countries of Germany, Austria and Switzerland, the company Polymedics. They have been trained and have started their initial launch and had initial cases. We think the volume will build through the year. However, just like any sophisticated market, they have something equivalent to a VAC committee. We will be adding additional distributors in other European markets throughout the year, aiming to finish the year with Europe largely covered. We will make contributions and projections as we get some momentum behind us and understand the demand pattern from Germany, Austria, and Switzerland. But 2024 will be the year to establish the foundation with our distribution partners, and 2025 will be where we expect to see substantial revenue.

Okay. That's perfect. Thank you.

Thank you. One moment for questions. Our next question comes from Matthew O'Brien with Piper Sandler. You may proceed.

Hey, this is Phil on for Matt. Thank you for taking our questions. Congrats on all the progress. I guess just return guidance. Considering that guidance is back half weighted, do you expect an inflection as you start to scale through some of these VACs, or is it going to be more measured? So I guess just any color on cadence as guidance implies a reacceleration of growth against tougher comparisons?

There are a couple of drivers. The VAC approvals that we're receiving here in the first quarter and those in the second quarter will be more fully productive during the second half. That is reflected in our planning that any time you convert a new account, you will see increased adoption over the coming year. We're also expecting that RECELL GO will launch on May 31. RECELL GO will replace our manual system and will make cases easier to execute, requiring less clinical support. While we don’t have direct sales tied to RECELL GO per se, the transition to using RECELL GO as our delivery vehicle does reduce the training requirements for our customers and our sales organization, which will lead to higher productivity. These are key assumptions in our model.

Thank you. That's helpful. And then as a follow-up, can you talk about your strategy regarding developing additional products, specifically as it relates to Stedical Scientific and any other products you feel AVITA will need in the future?

Our mission is to help the patients and physicians that use our products. With RECELL, we have a significant opportunity because we have a proven technology that does not have a direct competitor. We're in cases with patients who have serious injuries and wounds. There are other products that surround the use of RECELL that we can introduce to support our customers and help solve their challenges. PermeaDerm is an example of this. The porous, see-through wound matrix is much easier for clinicians to manage. It can be used in conjunction with RECELL or on its own. This is a technologically meaningful overlap for our sales team. There are likely other products we might consider in the future, but there's a strong focus on developing our company further into a robust wound care company.

Thank you. One moment for questions. Our next question comes from Ross Osborne with Cantor Fitzgerald. You may proceed.

Congrats on the progress. Thank you for taking the question. Maybe just one for me on RECELL mini. Would you spend some more time on why developing this product is important and why RECELL may not be as attractive for smaller wounds?

Thanks for the question, Ross. RECELL GO replaces the manual RECELL Kit. The RECELL kit covers 1,920 square centimeters, which is about 10% TBSA. A significant number of full-thickness skin defect patients have wounds under 500 square centimeters. To a surgeon, using a product designed for 10% TBSA to treat wounds under 5% TBSA seems wasteful. The reason we are developing RECELL GO mini is simply to offer a cassette with less tissue volume than the standard RECELL GO. Both will fit into the RECELL GO device, so smaller wounds will use the RECELL GO mini.

Yes, very helpful. Thanks for taking the question.

Thank you. One moment for questions. Our next question comes from Ryan Zimmerman with BTIG. You may proceed.

Good afternoon. Thanks for taking the question. I want to ask about the assumptions underpinning your long-term profitability comment. I know it's a bit too early for guidance on 2025, but could you help bridge us from current performance to 2025? What revenue levels or expense expectations do you have?

We're not ready to give guidance for 2025, but I can share some directional thoughts. Our expected growth rate for 2024 is between 57% to 69%. Our gross profit margin has been and will continue to be around 85%. You can back into the revenue exit rate from these figures. Achieving profitability by Q3 2025 depends on maintaining a growth rate of over 50%. This means we will accelerate our guidance; not only will we have heavier revenue in the back half, but we will also have a larger organization. This growth rate is accelerating against the prior year. We expect 2025 to reflect deeper penetration into the market for full thickness skin defects.

That’s helpful. I appreciate the color there. Maybe just another question. Given you are in the value analysis process with many facilities with the manual RECELL system, then you're going to introduce the RECELL GO system. I wonder how you're smoothing that process to ensure a seamless transition without impacting sales.

That's a very good question. The first principle during the RECELL GO launch is to make it easy for our customers. They need to understand that, in order to use RECELL, they will need to purchase RECELL GO cassettes. We're not charging them for the durable side of the product, which we believe will facilitate rapid adoption.

Yes, okay. Fair enough. Appreciate that answer, Jim. Thank you.

Thank you. One moment for questions. Our next question comes from Chris Kallos with MSTF. You may proceed.

Thanks, Jim. Jim, can you hear me okay?

I can. Good morning, Chris.

Good to see the results. Congratulations. I just wanted to pick up on adjacent products to the portfolio with PermeaDerm. You mentioned scaffolds, and I imagine there are other adjacencies you can look into. How does that impact your thinking around the sales force and how they will balance different products coming online?

With respect to adjacent products, these are used on the same patients and by the same physicians. Our sales reps are uniquely positioned because RECELL is a brand with a strong reputation. The introduction of other products that meet customer needs gives our reps opportunities to fulfill more demands, which increases our value to customers. The biosynthetic wound matrix of PermeaDerm offers many more applications than RECELL alone. When we're selling RECELL, we may discuss various patient indications before deciding on RECELL. However, all those patients are candidates for PermeaDerm. This is an advantage for our sales force.

Great. That's very helpful. And in terms of international markets, are you considering taking products like PermeaDerm abroad?

At this point, we are not considering international expansion for these products because our focus is on establishing RECELL fully first. It's still early in our international strategy. We expect our distributors will have a broader portfolio to help us sell RECELL. Thus, the priority is to secure RECELL domestically before moving to international strategies.

Sounds logical. Thanks for that.

Thanks, Chris.

Thank you. One moment for questions. Our next question comes from Madeleine Williams with Wilsons. You may proceed.

Hi, Jim. Hi, David. Thanks for taking my questions.

Hi, Madeleine.

In regards to the bottleneck with launching into trauma centers, how much feedback do you have on the ongoing process? Will you be able to achieve the uplift in the second half given the guidance you've provided for the first quarter and full-year outlook?

I think we're largely through the complex VAC process. We've been starting new accounts and they are progressing well. That slowed us a bit in the fourth quarter, but not significantly. This process is different and more complex, but with it comes a much bigger market with more patient indications. We're on target to add nearly 200 new accounts for the current year. We’re well-paced here in the first quarter to make that happen.

That's great color. In terms of the surgeons utilizing RECELL, are they aware of the new RECELL GO system and its differences?

Regarding the differences between RECELL and RECELL GO, we’re waiting for FDA approval before we start discussing RECELL GO with customers. That won't be a major hurdle since our focus groups have informed our introduction strategy. We expect a full conversion of our business model to RECELL GO by Q3.

Okay. That's really helpful. Thanks.

Thank you. One moment for questions. Our next question comes from Lyanne Harrison with Bank of America. You may proceed.

Yes. Good morning, Jim and David. Returning to the conversations about RECELL GO, how familiar is the international surgeon community with RECELL currently?

Across Europe, Australia, and Japan, there is moderate familiarity with RECELL. However, we were not commercial in anywhere but Japan previously, meaning most will be newly introduced. In Europe, as we launch the current RECELL, those seeing it will be the first to see RECELL GO when we receive CE mark, expected in Q3. No, we didn't train PolyMedics on RECELL GO; that will happen once the product is approved.

Great. And what about gross margin? You mentioned for 2024 that you'd guided to around 85%. Why don't you think you'll maintain that higher 87% margin going forward?

Actually, I didn't give guidance of 85%; we operate in that territory. That's why I'm emphasizing this point. Our margin with PermeaDerm will be at 50%, while RECELL will likely remain around 85%. We're making substantial investments in our manufacturing operation that will affect margin slightly. Additionally, introducing a low-margin product like PermeaDerm impacts our gross margin mix.

Okay, great. Thank you. Lastly, on operating costs, we saw a 43% increase in operating costs in 2023, similar to revenue growth. Should we expect that again for 2024, or will we find operating leverage towards the second half given anticipated revenue acceleration?

We don't foresee that same percentage increase in 2024. While sales expenses will rise due to expanding our workforce, R&D expense will not increase by 43%, and neither will G&A. Therefore, when we accelerate revenue towards the end of the year, you'll see operating expenses drop as a percentage of revenue.

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

Thank you. I would now like to turn the call back over to Jim Corbett for any closing remarks.

Thank you very much to all of you for joining our call today. We look forward to our next earnings call to announce our progress in Q1. Looking forward to hearing from all of you soon. Thank you.

Thank you for your participation. You may now disconnect.