AVITA Medical, Inc. Q2 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to the AVITA Medical Second Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will 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 first speaker today, Jessica Ekeberg, Director of Investor Relations.

Thank you, operator. Welcome to AVITA Medical’s second quarter 2024 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 and presentation are available on our website, www.avitamedical.com, under the investor relations section. Before we begin, I'd like to remind you that this call includes 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 for comprehensive descriptions of the risk factors. 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 results for the second quarter, followed by our priorities and outlook for the remainder of 2024. Following this update, I will turn the call over to David, who will provide commentary on our financial performance for the quarter before opening the call to Q&A. During the quarter, we focused on addressing the challenges we faced in the first quarter by implementing enhanced coverage strategy and other strategic initiatives focused on execution. Our commitment to these efforts and sustaining growth are reflected in our second quarter commercial revenue of $15.1 million, which was at the higher end of our previously provided guidance range of $14.3 million to $15.3 million. Additionally, one week ago, we entered into an exclusive multi-year development and distribution agreement with Regenity Biosciences. Through this agreement, following 510(k) approval by the FDA, we will hold the marketing, sales, and distribution rights to an AVITA Medical labeled collagen-based dermal matrix manufactured by Regenity. I will discuss it in more detail later in the call. To further support our growth and strategic initiatives, we have significantly strengthened our management team with the addition of Robin Vandenberg as Senior Vice President of U.S. Commercial Sales. Robin, who joins us from a distinguished career at Smith & Nephew, is an accomplished executive with a proven ability to drive new product adoption and growth across multiple specialties. Her leadership is a key part of our sales organization. She officially joined us earlier this week and we are confident that her vision and industry experience will be instrumental in expanding our market presence with RECELL GO, driving adoption of our portfolio products and accelerating growth. In addition to implementing enhanced coverage strategies, we are beginning to yield results from our full-thickness skin defect launch. As presented on slide three of our earnings presentation, we have become more efficient with both the VAC approval process and closing new accounts. In the second quarter, we added 31 new accounts, all of which placed orders. Moreover, we added an additional six accounts that received VAC approval but have not yet ordered, for a total of 37 accounts for the quarter. As a reminder, new accounts are launching with RECELL GO from the gate, eliminating the need for conversion. In terms of our pipeline for full-thickness skin defects, we have 52 accounts in the evaluation stage and 37 accounts in the decision stage, totaling 89 accounts with a healthy pipeline of additional prospects for the rest of the year. In addition, we have 19 facilities that are in VAC for PermeaDerm. With that, let's turn our attention to RECELL GO. In 2022, I outlined three initial priorities for AVITA Medical, including a commitment to a next-generation RECELL device, now known as RECELL GO. For those new to the story, the prior version was a single-use, battery-operated, manual system used to prepare spray-on skin cells capable of covering a wound area of up to 1,920 square centimeters or approximately 10% total body surface area. RECELL GO prepares the same spray-on skin cells and treats the same wound area, but features an evolutionary design with two components: a multi-use AC powered processing device and a preparation kit containing a single-use cartridge, disaggregation head, the RECELL enzyme, and other components. The RECELL GO processing unit controls the pressure applied to the donor skin to disaggregate the cells and precisely regulates soak time to optimize cell yield and viability. The standardizing of the process produces consistent results. Additionally, these enhancements streamline the preparation and simplify the user interface, reducing the training burden on medical staff and on our field team. On May 29, we received FDA approval for RECELL GO for the treatment of thermal burns and full-thickness skin defects. Demonstrating our unwavering commitment to patient care and rapid response, we shipped the first RECELL GO the next day. This swift action allowed clinicians, together with our team, to complete the first RECELL GO case on May 31, just two days after our FDA approval. And yes, the procedure was a success. This extraordinary effort was made possible by the dedication of our entire organization. I want to thank each and every team member for their invaluable contributions. Now let's dive into what RECELL GO means for our business. Please turn to slide four so you can see for yourself. For those participating by telephone, slide four has three images. In the first image, two RECELL GO processing devices were used; one device has completed its multi-step process while the other device had seven minutes left. Given that two single-use cartridges were necessary, we can assume that this patient had a burn injury of more than 10% but less than 20% total body surface area. In the second image, three devices were utilized for this case, indicating a burn injury of more than 20% but less than 30%. One cartridge had been fully processed, and those spray-on skin cells were ready for application while the other two devices were still in use. In the third image, four RECELL GO processing devices are operating simultaneously, suggesting a burn injury of more than 30% but less than 40% total body surface area. If you find that compelling, please turn to slide five. Here, you see a burn center clinician proudly showcasing not one, not two, but six RECELL GO processing devices that were used for a patient with more than 50% but less than 60% total body surface area. It's hard to see because of her mask, but I can promise you, she is smiling and so are we. For starters, RECELL GO's advanced features not only streamline the preparation of spray-on skin cells but also significantly boost workflow efficiency in the operating room. A physician can start preparing a patient's burn wound for the application of spray-on skin cells while the RECELL GO device is processing the donor skin sample, whereas with our prior RECELL device design, the physician would still be scraping cells from the first skin sample. Importantly, when the injury exceeds 10% total body surface area, like in slide number five, multiple RECELL GO processing devices can be used concurrently. This allows physicians to continue delicate and complex patient treatment while the machines are processing, significantly reducing operating room time for patients with major and severe burns and trauma injuries in critical condition. When you shorten the operating room time, a positive domino effect occurs, especially with large burn injuries. Following major burn injuries, patients lose the ability to regulate their core body temperature, placing them at high risk of hypothermia and other metabolic issues. As such, the ambient temperature in operating rooms for surgeries can be upwards of 100 degrees, most commonly around our average body temperature of 98 degrees, depending on the size of the injury and the patient's vitals. Compare that to the average temperature in an office space, which is between 70 degrees to 74 degrees. Thus, shortening operating room time directly benefits the patient by reducing thermoregulatory and hypermetabolic danger. Most importantly, RECELL GO was not just designed with the clinicians in mind; it was designed for patients, as a reduction in operating time means patients spend less time with open wounds and less time under anesthesia. The faster patients exit the operating room, the faster they start their healing journey. This is RECELL GO. RECELL GO, along with the ability to run multiple RECELL GO devices simultaneously, ushers in a new era in the treatment of partial thickness and full-thickness wounds. We believe integrating RECELL GO into patient care empowers clinicians to expand treatment capabilities, reach more patients, and achieve optimal outcomes, thus driving greater adoption and setting a new standard of care in wound care management. As discussed last quarter, we identified the need for a solution to treat smaller wounds, leading to the development of RECELL GO Mini, designed to address small wounds up to 480 square centimeters or approximately 2.5% total body surface area or less. While RECELL is viewed as highly effective for large burns, it's primarily seen as a large burn solution, leading to underutilization for smaller wounds. Trauma and burn surgeons prioritize clinical utility and often perceive the use of the current large kit for smaller wounds as inefficient. Recognizing that a majority of full-thickness skin defects are smaller than 480 square centimeters, RECELL GO Mini is poised to address the significant market need offering a tailored solution for these smaller wounds. Regarding the timing of RECELL GO Mini, we submitted a PMA supplement to the FDA on June 28. This version utilizes the same multi-use processing unit as RECELL GO and features a cartridge designed for the smaller donor samples needed for smaller wounds. Importantly, this submission benefits from the same breakthrough device designation that was granted to our existing RECELL system, ensuring a prioritized 180-day interactive review period implying an approval date of December 27. Before we move into our new dermal matrix, I have a brief update on our international expansion efforts. We are making progress expanding into most of the European Union through third-party distribution partnerships. Over the last few weeks, we have executed distribution agreements in Belgium, Holland, Ireland, Italy, and the United Kingdom, and four Nordic countries. Additionally, the countries of Spain and Portugal are on the near-term horizon. Regarding our European Union efforts, we expect to receive the CE mark for RECELL GO this quarter. As demonstrated with our success in the U.S., we are fully prepared to meet the supply demands upon approval. Moving on to our portfolio of products. Last quarter, we showed you slide six, which reflects a broad continuum of clinical needs in burn, surgical, traumatic, and chronic wound care. While RECELL will remain the cornerstone of our portfolio, we have been actively exploring wound bed preparation and dermal replacement products to complement RECELL and address this full spectrum of clinical needs. To that end, we had PermeaDerm in the first quarter and now have an AVITA Medical label dermal matrix in development with Regenity. Both PermeaDerm and the dermal matrix are compatible with RECELL and each other, and both can be used alongside the treatment of many of our burn and full-thickness cases to further aid in healing. Collectively, these products align with our vision to build a broad-based wound care company. To better understand our strategy with Regenity, I will provide an overview of Regenity and discuss our regulatory, clinical, and commercial plans for our dermal matrix. For more than 25 years, Regenity has been the leading global developer and manufacturer of proprietary, bio-resorbable materials used to repair and regenerate natural tissue and bone for a variety of clinical areas, including dental, spine, orthopedic, neurosurgery, ENT, advanced wound care, and nerve repair. Initially focused on collagen-based medical devices, Regenity has since expanded its platform to include versatile, bioresorbable, and biocompatible synthetic polymers, bioceramics, and other bioresorbable materials. Throughout its history, Regenity has successfully assisted med tech clients in securing regulatory approval for more than 70 product lines. After robust diligence and preclinical research, we have the animal data to demonstrate the effectiveness of a regenerative dermal matrix to promote cell growth in the wound bed. We expect 510 clearance in the fourth quarter, followed by an initial launch with the 510(k) indication. Regarding our clinical plans, immediately following clearance, we plan to initiate multiple post-market clinical studies to establish the unique synergies between our new dermal matrix and RECELL. These studies will include the evaluation of our new dermal matrix and other commercially available dermal matrices in full-thickness wounds, followed by delayed treatment with a split-thickness skin graft plus RECELL and a two-stage procedure, which is the current standard of care, to demonstrate improved time to grafting and wound closure. Additional clinical studies will evaluate the use of our new dermal matrix with immediate grafting together with RECELL and a single procedure aimed to establish a new standard of care. We expect to begin enrollment in both these studies in the fourth quarter for completion in 2025. Let's revisit slide seven of our presentation, which illustrates the complementary nature of RECELL, PermeaDerm, and our new dermal matrix with other potential additions to our portfolio. Here's an example of a full-thickness skin defect with concern for infection. In this instance, the dark blue layer represents dressings for wound bed preparation, a current focus. This product serves as a protective antimicrobial layer in the base of the wound bed to maintain an optimal healing environment. This layer can be used in every single patient. The green layer represents the new dermal matrix. This type of matrix aims to generate vascularized tissue further supporting definitive closure. The light blue layer represents RECELL with a meshed split-thickness skin graft. As you are aware, this procedure provides definitive closure using significantly less skin compared to traditional autografting. Lastly, the purple layer represents the transparent Permiaderm dressing optimized for protection and moisture management. By addressing the full spectrum of clinical needs across our portfolio, we believe that we can improve accessibility and reach more patients, which is our number one priority. Now an update on TONE, which is our post-market study for Vitiligo. We have completed the six-month follow-ups and are on pace to have the research accepted for publication with the six-month TONE data and manuscript by the end of the fourth quarter. The same timeframe applies to the healthcare economic study associated with our Vitiligo initiative. In closing, we are taking advantage of a well-executed quarter to maintain momentum and remain committed to our efforts to expand our reach, drive increased adoption, and sustain growth with our indications, as well as our expanding portfolio, all with the goal of delivering value to our shareholders, customers, patients, and employees. With that, I'll turn the call over to David.

Thank you, Jim. For the three months ended June 30, 2024, our commercial revenue reached $15.1 million, which is an increase of approximately 29%, compared to the same period in 2023. As you can see on slide eight, the revenue growth trajectory over the last eight quarters has been significant and we believe it will only accelerate over the remainder of the year and subsequent years. RECELL products accounted for approximately 98% of our commercial revenue, while our other wound care products contributed approximately 2%. With our two new products, Permiaderm and our dermal matrix, the revenue for other wound products will increase in subsequent quarters. Our revenue results for the quarter, plus improved commercial and VAC processes and the hiring of Robin VanDenburgh, position us well for sustained revenue growth for the remainder of the year. Gross profit margin for the quarter was 86.2%, compared to 81.2% in the same period in 2023. This 500 basis point increase is in line with our expectations for the full year 2024 as revenues and volume of production continue to provide a healthy and improving gross margin. Total operating expenses for the quarter were $28.7 million, compared to $21.2 million in the same period in 2023. The increase in operating expenses is primarily attributable to an increase of $6.3 million in sales and marketing expenses due to employee-related costs, including salaries and benefits, commissions, and travel expenses collectively as a result of an expansion of the commercial sales organization in the second quarter of 2023 and again in Q1 2024 to support our growing commercial operations. G&A expenses increased by $1.4 million as a result of higher salaries and benefits and an increase in severance benefits, partially offset by lower stock compensation and professional fees. Additionally, R&D costs decreased by $0.2 million, due primarily to lower employee compensation costs for our medical science liaison teams. Other income increased by $0.8 million to $1.6 million in the current quarter. Other income for the quarter consists of non-cash income of $2.1 million due to the change in fair value of the warrant liability, offset by $1.2 million of expense for the change in the fair value of the debt and $0.7 million in income related to our investing activities. Net loss for the second quarter was $15.4 million or a loss of $0.60 per basic and diluted share, compared to a net loss of $10.4 million or a loss of $0.41 per basic and diluted share in the same period in 2023. As of June 30, we had cash, cash equivalents, and marketable securities of $54.1 million, compared to $89.1 million as of December 31, 2023. We maintain our previous guidance that we will reach cash flow break-even and GAAP profitability no later than the third quarter of 2025. Turning now to our revenue guidance for Q3 2024. We believe it is crucial that we reestablish credibility with our shareholders. We have taken significant steps towards this goal by reaching the upper end of our Q2 guidance. For the third quarter of 2024, we remain committed to providing guidance that reflects our capabilities while achieving substantial revenue growth. With that in mind, we expect commercial revenue to be in the range of $19 million to $20 million, representing approximately 40% to 48% growth compared to the same period in 2023. With a strong start in July, we are confident in our commercial team's ability to deliver on this target. Regarding annual guidance, our Q1 revenue miss has impacted our full-year expectations. Although we are confident in our Q3 guidance, reaching the lower end of our prior guidance of $78.5 million is no longer feasible. As a result, we are revising our annual guidance to an attainable range of $68 million to $70 million. Even with this adjustment, we expect to achieve over 37% growth year-over-year, reflecting our ongoing growth trajectory. With new sales management, improved VAC and commercial processes, the recent launch of RECELL GO and Permiaderm, and the anticipated commercialization of our new dermal matrix in Q4, we intend to build on our second quarter momentum and continue delivering strong results. Given our solid performance in July, we look forward to meeting our Q3 revenue expectations. With that, we thank you for joining us, and now I will 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 Ryan Zimmerman at BTIG.

Hey, guys. Good afternoon. Thanks for taking our questions. Can you hear me okay?

Yes, we can, Ryan. Good to hear from you.

All right. Well, I wanted to ask about the guidance. I appreciate you guys took a prudent approach with the adjustment to guidance here. Maybe David, talk to us about kind of what underpins your view, particularly for the fourth quarter. It's still a sizable step up from what we saw this quarter and how much contribution are you expecting from full-thickness skin defects? Jim, if I recall last quarter, your goal as you entered this year was about 15 accounts per month. We're still not there yet, so I know July is off to a good start, but talk to us maybe a little bit more about kind of what that means from July?

Yes, Ryan, I think maybe I'll take this simply first. Fundamentally, the big driver is the RECELL GO conversion, which we expect to substantially complete within the quarter. And if you were able to see the slides, you would note using RECELL GO has a consequence of greater utilization. So that is one of the underpinning efforts. During the quarter, we did, you're correct, we did not average 15. However, we had a total of 37 approvals, 31 who ordered and six who got approved who were going to order. So we substantially improved that. We also have 85 in the VAC decision stage of one of two different stages we categorized them in. So that's 85 in the pipeline that have schedules, evaluations, or decisions during the quarter. So we have a lot there plus the Permiaderm; the launch of it takes a little time. It was really a beginning of Q2 launch. So we've just started to get our legs under our feet. At the moment, we have just under 29, I believe 19 in the backlog, and we're getting progressively more activity with that. So we do have a lot of wind at our back in terms of execution materials, you know, the things you need to make the number grow the way that it needs to. So that is fundamental to what's driving our guidance for the next two quarters.

Okay, that's helpful. And then, David, you've repeated the guidance that you would be cash flow, I think, break even by the third quarter of ‘25. But your expenses are up. Cash burn's down a healthy bit. You know, what are you going to cut back on potentially? Where can you cut back just to get to that point? Or is it all predicated on top line revenue growth, particularly in 2025, as an acceleration off the levels you're seeing this year?

Yes, thanks, Ryan. For the most part, it's all driven by top line growth revenue. We are still projecting 86% greater margin. So just for example, even with our guidance for this quarter, which is around $20 million, you know, at 86%, that's about $18 million of gross margin. And you're right, our operating expenses are up, but the operating expenses also include non-cash items of stock comp and depreciation amortization. And so if you project out sequential revenue growth over the next few quarters, and you can pick a number that you would like as far as whether it be 30% or 20%, we can see that we can get there, and we can cover our operating expenses in three to four quarters.

No, I appreciate it, David. And yes, I understood. Okay, I'll hop back in queue. Thank you for the color, guys.

Our next question comes from Joshua Jennings at TD Cowen.

Good afternoon.

Hey, Josh. How are you doing?

Good, thanks for taking these questions. Good to catch up here. I wanted to just ask Jim, I think I know the answer to this, but just early days of the full thickness skin defect indication launch, and just what you're seeing out in the field, are you still as optimistic as you were pre-launch, and any different thoughts just in terms of the TAM and the opportunity here in the U.S. for RECELL and that indication?

One moment, the speaker is having some technical difficulties.

Okay. I thought they were on my end. Thanks.

Okay, our speakers are back on.

Okay, Josh, are you still there?

I am, Jim, thanks. I'm not sure if you caught my question or not.

I think we solved it. Okay, back to your question. With regard to full thickness, so what have we learned and what have we done? So the simple answer to your question is we're just as optimistic about the TAM and the potential for it as we were. What we've learned is that we're going to centers where RECELL is a very new idea, where they've known about it in the burn world for a long time. So that results in really three forms of VAC processes and two of them dominate. We'll get a conditional VAC due in evaluation before we give you full approval, or they'll say, prior to VAC, do an evaluation before we approve you at VAC. A smaller number than those two gives us approval straight away. So that's really created that longer VAC approval period. And you can see, though, the interest. Our numbers of accounts last quarter that we converted were 22. We have 37 approvals, 31 have ordered this quarter, and we have 85 additional in the pipeline. Now, further to what we've also learned, it caused us to develop, validate, and submit the data for the RECELL GO Mini for the smaller, under 480 square centimeter wounds. So I think that's going to continue to build the adoption. But those are things we learned. We remain quite bullish on the market potential. And of course, we get to add Permiaderm as a dressing addition, excuse me. And of course, with our dermal matrix, we'll have that and it won't be tandem because it'll be three product lines that can potentially be used on each of these patients.

Oh, that's great to hear. And I wanted to — it's nice to see just the build-out of the portfolio and addressing the continuum of this wound care action. I wanted to hone in on the Regenity dermal matrix product and maybe just help us think about the competitive landscape there, the size of that segment, and anything you can share in terms of pricing expectations per case. Thanks for taking the questions.

Yes, it's a multiple-layer question, so let me give you a range. The competitive marketplace has approximately a price range of let's say $14 to $15 a square centimeter on average in the hospital, okay? So if you extended that, and that would be the market leader with the most data. And if you extended that, it would be $28,000 for a 2,000 square centimeter wound. Okay, so that's a substantially significant potential sale. Now, in our case, we have some expectations. First of all, selling it with a 510(k), we will have to sell it for less than that at the outset. As we build our data and achieve two-stage comparability, we'll be able to achieve a higher ASP. Now, stepping through that one more time, we have a high belief and based on the validated large animal pig models, where we've compared the dermal matrix that we've had designed for us versus the competitors in the market, the two key measures are the time it takes to become graft ready and the time it takes to fully close. Obviously, the first one is when you apply the graft over the thermal matrix is key. Now in our non-clinical animal studies, we close at nearly half the time of any other product on the market, which will naturally lead to an earlier closure time, which is incredibly valuable for patient care, for the patient getting out of the hospital and for the cost of care. If you take one further step, which we intend to still have to validate, the other qualities of this dermal matrix include its absorption and histological integration with the wound. We believe that one of the studies we're going to run is going to be a single-stage closure with RECELL, where you apply the dermal matrix with RECELL and split thickness skin graft all in one procedure, and then you don't have two procedures. So it's really a rather, you know, if we achieve parity on the two-stage, but we do it much quicker, that has huge market competitiveness. If we can validate the size of wound that will respond to a single-stage closure, we redefine patient care. So this is really a big potential.

That's super helpful. Thanks for all those details.

You bet.

Thank you. Our next question comes from Brooks O'Neil at Lake Street Capital Market.

Hey, guys. This is Aaron on the line for Brooks. Thanks for taking our questions. Just going back to the guidance real quick, you know, with this new range, I guess, are you guys feeling any sort of heightened pressure from the debt governance as you sort of move forward to the back half of the year? I think with the new range, you're just a tad above the first revenue governance at the end of the year? I guess just how are you sort of thinking about that as we sort of approach the back half of the year here?

Well fundamentally what we're thinking about is executing well. You know, in Q2 we improved our execution really significantly over Q1. Q3 we're off to a, you know, when we set this guidance, you should keep in mind July's in the rearview mirror. So we had a very strong July. When we look forward to the year, yes, there's a debt covenant there. Are we thinking much about it? Candidly no. What we're thinking about is executing Q3. We execute Q3; Q4 will take care of itself, and we don't think there's much challenge there. Yes, it's tighter, but we're not focused on that. We're focused on executing our plan, building out our portfolio, and getting back on the growth track and being reliable in our guides.

Yeah, okay, that makes sense. Thank you for that. And then I guess maybe just a little bit more color on the international expansion. I know you mentioned a few countries that you were starting to enter there in your prepared remarks, but maybe just what does that process sort of look like long-term? Do you have any areas specifically where you want to focus more or maybe just how are you sort of thinking about that experience moving forward? Thanks, guys.

Sure. Sure. That's a good question. So let's recall the filter. The filter was, number one, to have a healthcare system that can utilize RECELL. So there's really not that many of those. The second filter was to have a population that made it worthwhile to go there and the ability to pay is the third filter. So that largely confines you to Australia, Japan, and most of the European Union. What we're focused on right at the moment are approximately 10 countries in the European Union. Well, we described it. There's the Nordic countries, U.K., which is not in the EU, of course, but it's nearby. Little change in geopolitical world, but so Belgium, Holland, Germany, Austria, and Switzerland are with a single distributor. We're close with Spain and we're close with Italy. In fact, we expect all those to happen this quarter. One of the things that has paced our entry is the approval of RECELL GO in the EU under the new MDR. We do expect that within the quarter. So that is going to make a breakout because really it's much less training to use RECELL GO than to implement the coverage strategy we took here in the United States, and that amount of case coverage and training that's required has been substantial in our history. And we already see the difference. So we're going to be principally focusing on the countries I just named. Australia, we're not quite there yet, and we are on the market in Japan with the burn indication. RECELL GO is well behind the rest of the geographies that we intend to operate in. But we're going to focus EU, Australia, Japan internationally through third-party distributor partnerships.

Okay. Thanks for that, Jim. I'll leave it there. Thank you.

You bet.

Thank you. Our next question comes from Ross Osborne at Cantor Fitzgerald.

Hey guys, thanks for taking our questions. So, looking at your full thickness indication, which is clearly a broad indication, are you seeing adoption for any particular defects within it more so than others? And then, with the launch of dermal and combination with RECELL, is that particularly useful for certain defects more so than others, again within that broad full thickness indication?

Okay, two broad questions. What I'll say about full thickness is we are much more seeing the responsiveness in acute wounds, degloving, necrotizing wounds, those types of wounds, severe trauma, much less focus in the moment in chronic wounds, like diabetes, foot ulcers, or VLUs, for example. So we're seeing them in acute wounds. That's where the initial, as we've been in the market now, just about a year, that's really where the action is for us at the moment. Now, turning to our dermal matrix, where will it apply? It will actually apply to our burn world in a big way. It will apply to all of the full thickness cases. It will also apply to the chronic wound market as will Permiaderm. So both the dermal matrix and Permiaderm will fit the whole full thickness continuum. RECELL and chronic takes a bit of study to figure out how to identify which patients will be responsive to that. So we're doing some work on that. And what's in question in terms of effectiveness is chronic wounds are chronic for a reason. They have an underlying condition, for example, a venous leg ulcer is a failure to have venous return, because of an incompetent deep vein valve failure, right? So without a solution to that, you have difficulty finding which patients will be responsive and have a durable skin graft as a solution. So there's work to do there. But it's a broad, rich, and deep market, that is for sure, especially with our new portfolio.

Okay, great. That's very helpful. And then one more on the international side of things. Could you walk through the reimbursement dynamics, broadly realizing, you know, it made very by geography. And then in terms of the amount of sales force you think you'll need to support growth, and is that contemplated in your 3Q ‘25 cash breakeven guidance? Thank you.

Sure. The reimbursement process varies across the 10 countries, as each has its own healthcare system. All of them are capable of using RECELL and obtaining reimbursements, which we share with our distributor. However, reimbursement is influenced by the social system, making it a complex issue. We may need to schedule a separate call to discuss it in detail because it varies. We anticipate an average selling price for end customers that will be about 75% to 80% of our U.S. average selling price, which will be divided among the various cases. This indicates that the reimbursement system is less complex. Regarding the salesforce, since we are utilizing third-party support internationally, we do not need to expand our team. In the U.S., we do not plan to increase our commercial headcount in the next 18 months, as we believe our current team is adequate to cover and penetrate accounts, especially with our expanded product line, providing ample opportunities over the next 18 months.

Okay, great. Thanks for taking our questions.

You bet.

Thank you. Our next question comes from Lyanne Harrison at Bank of America.

Hi Jim, hi David. Can you hear me okay?

Yes, we can hear you. Good morning.

Good morning. Sorry, it's good evening for you over there. But can I talk about your slide three and the pipeline that you've currently got there, something in the vicinity of, you know, 89 accounts in the pipeline? Can you tell me how long it's taking currently to get through the VAC evaluation stage, the VAC decision stage, and also for this quarter, you've got some that are VAC approved but no orders yet. How long does it normally take once they're approved for them to put orders through?

Perfect. You're helping us break down, there's a few stages there. In the VAC decision stage, the multiple VAC stages, let me characterize it this way. There are VACs that have a pre-case evaluation clinical use where the VAC is given that direction, and then they were subsequently approved. There's a category, which is in there, where the VAC has said, we provisionally approve, do an evaluation, and report back to us before we officially do it. That's a subtle difference between the two, but that's the difference. And that is the majority; those two together. The third is we occasionally get a VAC approval straight away, but it is a minority of our experience. Now, how long is it taking this group in general? It's between four and six months. So what you see is that of like, for example, the 31 and six this quarter, that of course is up from 22 Q1 to 31 plus six; 31 ordered. Six didn't; they were approved late in the quarter. Typically, following VAC approval, we'll get an order within a week or two. So it's usually quite quickly. Getting through the process, however, is taking us rather consistently four to six months. So 85 is building, so our pipeline, if you go back, we'll achieve more than 200 new accounts this year at our current pace. So it's happening a bit longer than we expected and as much as we work at it we are able to shorten it and make it more consistent and more understandable. It still takes time.

Okay and just to understand that as well, so if I'm looking at four to six months and where you were at the process earlier in the year, has that process gotten shorter? Has it gotten more efficient for you? I'm just trying to understand, you know, if we get to this time next year, do you think it would still be taking four to six months to get through a VAC process?

So what I will say is we have a much better understanding of it. Do I expect it to get shorter? I do. One of the things that we realized as we launched into it this, you know, it's been a year at this point, we had not applied to a VAC of any regularity for more than two years. So it became a new skill and experience for our organization. So I do expect it to get shorter. Also, I expect the number of accounts to diminish. You know, at some level, if you take all trauma centers, you're in the order of, let me see, something in the order of 700 to 750 accounts in the United States. And if you reverse back to where we currently are, we've got somewhere around 220, 230. We've got 85 in the pipeline for Q3. So we'll end the year well over 300, three-quarter, 350. And mostly those are the bigger accounts. There will come a time when penetration is the bigger name of the game, and one of the benefits of RECELL GO is that it makes it much easier to adopt. Hopefully, you saw the slides; if not, I'll send them to you. But also the RECELL GO Mini will be applicable to many more smaller full-thickness defects. So in combination those give us a lot of opportunity. Of course, many of them need a dermal matrix and all of them need addressing like Permiaderm.

Okay. And previously, you spoke about approval rates or essentially the rates that didn't approve, or VAC communities didn't approve RECELL. Can you talk to us about that, you know, what happened through the second quarter of ‘24, and to the extent that there were any non-approvals, have you gone back to them and did those change and become approvals eventually?

Yes, we've had a very small number historically. We had no turn downs during the quarter, for example, and we have historically still had only four or five out of now nearly 200 ads. So it's a statistical just unlikely event for us as we've learned.

Okay, thank you. And then, Permiaderm sales. So are you able to give us an indication? I know it's still small, but for the second quarter, how much of total revenue was Permiaderm sales?

Yes, this is David. So it averaged around 2% for the quarter, so a very small amount in the second quarter. We see that picking up very substantially over the rest of the year.

Okay. And then you mentioned you weren't adding any more headcount to your sales force in the United States. But I'm just trying to understand how much of your sales force time is currently spent promoting or selling RECELL versus Permiaderm. I guess I'm trying to understand, yes, I think it's great that you've got a wider product portfolio, but could you perhaps have that sales force time more directed towards selling RECELL and getting that top line traction?

The positive aspect of our strategy is that RECELL is at its core. From a sales perspective, this allows our team to effectively sell in real-time. When handling a case with RECELL, the focus is on training and support around it. After applying RECELL, the next step is to apply a dressing, which is when we introduce Permiaderm. We then engage with our customers regarding aftercare, which is crucial because it ensures that the dressing is not changed in a way that could hinder the healing process. During these aftercare discussions, there’s also an opportunity to mention Permiaderm. If a dermal matrix is being utilized, it’s applied right after the wound treatment, followed by a split-thickness skin graft alongside RECELL, and then another dressing is applied. This sequence does not create any timing conflicts; it all occurs within the same patient, under the same doctor, during the same procedure.

Okay, thank you very much. I'll leave it there.

Thank you, Lyanne.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Jim Corbett for closing remarks.

First of all, thank all of you for attending the call. I appreciate the questions. We're looking forward to our future meetings, communications, and next quarter's call to report our Q3 results. Thank you again.

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