Earnings Call Transcript - RCEL Q2 2022

Operator, Operator

Hello. Thank you for standing by and welcome to the AVITA Medical Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Caroline Corner. Please go ahead.

Caroline Corner, Investor Relations

Thank you, operator. Welcome to AVITA Medical's second quarter 2022 earnings call. Joining me on today's call are Dr. Mike Perry, Chief Executive Officer; and Michael Holder, Chief Financial Officer. 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 fact 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, and the impact of COVID-19 on its operations and its customers' operations. 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 factors described in AVITA Medical's S3 and 10-K filings, and in AVITA Medical's quarterly report on Form 10-Q for the first quarter ended June 30, 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 with the second quarter 2022 results is available on its website, www.avitamedical.com under the Investors section and includes additional details about its financial results. AVITA Medical's website also has the latest SEC filings which you are encouraged to review. A recording of today's call will be available on AVITA Medical's website by 05:00 PM Pacific Time today. Now, I would like to turn the call over to Mike for his comments on second quarter 2022 business highlights.

Dr. Mike Perry, CEO

Thank you, Caroline, and thank you everyone for joining us today. We continued to deliver strong growth in our top line revenue this quarter. And we are pleased to report record commercial RECELL revenues, which exclude BARDA revenue of $8.2 million compared to $6.7 million, a 23% increase over the same quarter last year. Our commercial revenue was $15.7 million in the half year ending June 30, 2022, an increase of $4.4 million, or 39%, compared to $11.3 million in the corresponding period in the prior year. In the quarter, we achieved greater penetration and a larger base of accounts, leading to an increase in the overall burn cases treated with RECELL. With ongoing improvement in access to burn centers and in-person meetings, we were able to resume our commercial activities in the new normal operating environment. Our commercial team increased their field training cadence to reach over 300 burn care providers each month, up from approximately 200 per month in the first quarter. In addition, we are continuing to conduct webinars and summits that are now in person to further broaden our reach. An increase in field training coupled with case support, designed to help alleviate staffing constraints, has allowed us to broaden provider adoption, deeper penetration, and ultimately increased order size. We began selling the ease of use RECELL device to our larger accounts this quarter, which is resonating well, particularly with those customers who are experiencing ongoing staffing challenges that I just mentioned. We have shipped the new device and a phased release to approximately a quarter of our accounts. Turning now to the outpatient market, we initiated our limited launch in March. As we expanded to new indications, our outpatient market will become a larger portion of our addressable market and an increasingly important patient population supporting our continued growth. While the bulk of burn procedures are inpatient, we expect that outpatient treatment will comprise our core soft tissue market. As such, we are working to familiarize centers with outpatient care pathways, coding, and coverage. Relative to Japan, we, along with our partner COSMOTEC, completed our first training and evaluation cases in Japan during the quarter. As I mentioned in our last call, discussions are ongoing with the Japanese authorities regarding reimbursement and pricing, which we anticipate will wrap up later this year. I'd like to highlight a recent media story in which a 12-year-old homeschooled student's science experiment exploded, resulting in second and third-degree burns to over 50% of his body. In addition to the student, his mother sustained second and third-degree burns while saving her son's life. Both the boy and his mother have been undergoing RECELL treatments at The Joseph M. Still Burn Center of Doctors Hospital of Augusta, Georgia, which is the largest burn care facility in the United States and one of our largest customers. We are inspired by the burn community, which has been uplifting the family during this crisis, and we're encouraged by both the mother and the son's recovery thus far. Moving on now to our pipeline indications. We made solid progress in our soft tissue reconstruction and stable vitiligo trials. We just released top-line data for our soft tissue reconstruction trial. The study had co-primary endpoints based on pairwise comparisons, where each subject received both RECELL used in combination with widely-meshed skin grafting and the control treatment of conventional skin grafting. One endpoint had a hypothesis of superiority for donor skin sparing and the other co-primary endpoint had a hypothesis of non-inferiority for healing. RECELL showed statistically superior donor skin sparing versus the conventional autografting standard of care control, thereby achieving that point. While comparable healing was observed between RECELL and control, pre-specified statistical non-inferiority was not met. Nonetheless, the statistically significant donor sparing and comparability in observed healing, along with the established safety record of RECELL, together point to a favorable benefit-risk profile. As such, we will proceed as planned with PMA submission for both the soft tissue and vitiligo indications later in 2022, with FDA approvals anticipated in the second half of 2023. As I mentioned previously, once approved for soft tissue reconstruction, we expect to initially leverage our installed base of burn centers and our existing infrastructure to launch the RECELL system into our burn centers that are co-located with Level 1 and Level 2 trauma centers. From there, we plan to grow into another 200 to 250 high-volume trauma centers, which do some burn cases as well, and we will update you on our plans here in future calls. Notably, trauma centers will be able to use the existing reimbursement codes currently being used in the burn setting. We are excited to deploy what we've learned in burn care to efficiently and effectively address the soft tissue trauma opportunity. Turning now to vitiligo and as we've stated in previous calls, this is a skin disorder characterized by deep pigmented areas of skin that appear as white spots or patches, primarily attributed to an underlying autoimmune disorder in the patient. There are an estimated 100 million sufferers of vitiligo worldwide, including up to 6.5 million Americans. With the recent completion of patients' six-month follow-ups for our vitiligo clinical trial, we expect top-line data followed by PMA submission during the second half of 2022, with FDA premarket approval and commercial introduction anticipated prior to the end of 2023. We recognize that our current RECELL product involves hands-on preparation of the cell suspension by physicians and/or their supporting staff. To make the best use of physician and support personnel time in the dermatologists' office to address our vitiligo opportunity, we are developing an automated RECELL device. We are encouraged by the FDA's recent approval of a topical JAK inhibitor, which we believe will further drive vitiligo disease awareness in this very large market that has limited effective treatment options. Over time, we anticipate multiple product entrants to this compelling opportunity. We believe the strong safety record of RECELL, and the one and done nature of the associated treatment procedure will be differentiated as well as medically and commercially important. We've been working diligently on vitiligo commercialization activities. AVITA has attended nine dermatology conferences since January of this year; at these conferences, over 25 sessions featured vitiligo, a marked increase year-over-year as JAK inhibitor and RECELL have stimulated interest in vitiligo treatments. Importantly, RECELL received numerous mentions in these sessions. With that, I'd now like to remind you of our strategic growth drivers. We are keenly focused on driving healthcare provider engagement through education, maintaining our recent momentum in burns. The fall conferences are just ahead, and we are excited for continued in-person conversations. Second, we anticipate submission of PMA supplements by the end of 2022 for both soft tissue reconstruction and vitiligo indications, and we continue to plan to enter those markets in the second half of 2023. Lastly, and turning to a longer-term growth driver, our pilot work in establishing RECELL within the outpatient setting continues, where we anticipate the future bulk of soft tissue trauma cases. In summary, we are executing on our business objectives and have successfully achieved several key milestones this year. I'm encouraged by our commercial team's performance, driving advanced practice training and keeping RECELL front and center in the minds of burn care practitioners. I look forward to updating you later this year on our continued progress in our exciting pipeline indications. With that, I'll now turn it over to Michael for details on our financial performance in the quarter.

Michael Holder, CFO

Thank you, Mike. Relative to our three months ended June 30, 2022 financial results. Our commercial revenue, which excludes BARDA revenue, was $8.2 million for the three months ended June 30, 2022, an increase of $1.5 million or 23%, compared to $6.7 million in the corresponding period in the prior year. Total revenue, which includes BARDA revenue, was $8.3 million in the current year compared to $10.3 million in the corresponding period in the prior year, which included $3.6 million in BARDA related revenue that resulted from our delivery of units to manage inventory for BARDA for emergency response preparedness. The growth in commercial revenues was largely driven by an increase in the number of customers ordering as well as the average order size for those customers. Gross profit margin improved by 3% to 83%, compared to the corresponding period in the prior year. Total operating expenses increased by 3% to $13.9 million compared to $13.4 million in the corresponding period in the prior year. The increase in operating expenses is primarily attributable to higher compensation costs, sales commissions, and professional fees, partially offset by lower clinical trial-related expenses. Higher compensation costs resulted from an expansion of our commercial team, while higher commissions were driven by an increase in revenues. Higher professional fees were driven by an increase in pre-commercialization activities for RECELL launches in soft tissue reconstruction and vitiligo. Clinical trial expenses incurred in our soft tissue and vitiligo trials were lower during the period as trial participants were in the follow-up phase, which is less costly than the earlier recruitment and treatment phases. Net loss increased by 33% or $1.5 million to $6.3 million or $0.25 per share, compared to a net loss of $4.7 million or $0.19 per share in the corresponding period of the prior year. Adjusted EBITDA loss increased by 51% of $1.6 million to $4.7 million over the $3.1 million recognized in the corresponding period in the prior year. Relative to our six months ended June 30, 2022 financial results, our commercial revenue, which excludes BARDA revenue, was $15.7 million in the six months ended June 30, 2022, an increase of $4.4 million or 39%, compared to $11.3 million in the corresponding period in the prior year. Total revenue, which includes BARDA revenue, was $15.9 million in the current year, compared to $19.1 million in the corresponding period in the prior year, which included $7.7 million in BARDA related revenue that resulted from our delivery of units to manage inventory for BARDA for emergency response preparedness. The growth in commercial revenues was largely driven by an increase in the number of customers ordering as well as the average order size for those customers. Gross profit margin improved by 2% to 80%, compared to the corresponding period in the prior year. Total operating expenses increased by 12% to $29.9 million compared to $26.6 million in the corresponding period in the prior year. The increase in operating expenses is primarily attributable to higher compensation costs and professional fees, partially offset by lower clinical trial-related expenses. Higher compensation costs were primarily a result of increased share-based compensation expenses due to certain performance milestones being met, higher commissions driven by an increase in revenues, and an expansion of our commercial team. Increased professional fees were driven by an increase in pre-commercialization costs for RECELL launches in soft tissue reconstruction and vitiligo. Research and development expenses were lower relative to the prior year, during which higher costs were incurred related to recruitment and treatment for the soft tissue and vitiligo clinical trials. Net loss increased by 47% or $5 million to $15.7 million or $0.63 per share, compared to a net loss of $10.7 million or $0.45 per share in the corresponding period in the prior year. Adjusted EBITDA loss increased by 46% or $3.5 million to $11.1 million over the $7.6 million recognized in the corresponding period in the prior year. A table reconciling non-GAAP measures is included in the related press release for reference. Turning to guidance, commercial revenue in calendar year 2022 is projected to be approximately $30 million, excluding BARDA revenues, which represents a 20% increase year-over-year. We project BARDA revenues of approximately $0.3 million in calendar year 2022 as compared to $7.9 million in calendar year 2021 since we completed delivery of RECELL units into the national stockpile in 2021. With that, we thank you for your attention, and now I will turn the call back over to the operator for your questions.

Operator, Operator

Our first question comes from Josh Jennings with Cowen. You may proceed.

Josh Jennings, Analyst

I was hoping to focus on the pipeline and wanted to Mike just ask about the soft tissue top-line data and understand that there was comparable healing in that one of the co-primary endpoints, but maybe you could just help us understand that and give a little bit more detail on why you think that not hitting the statistical non-inferiority could be overcome and just any details you can share on the comparability and why you're confident that this submission is approvable?

Dr. Mike Perry, CEO

Sure, Josh. Thanks for the question. Really the aim of the study was to show that RECELL treatment in soft tissue injury results in equivalent healing while using less donor skin. So, we have co-primary endpoints. The first endpoint, donor skin sparing, was achieved at P less than 0.001, so that one's claim. The non-inferiority healing was achieved at P equals 0.048, which is equivalent to P less than 0.05, but was not achieved at the pre-specified statistical significance of P less than 0.025. And basically, what you're looking at is a 95% confidence interval around a two-sided T test for a 0.025. If you're looking at a 95% confidence interval around a one-sided T test, which often the FDA accesses for approval, then you've got the 0.025 on a one-sided T test. So based on that, as well as the benefit-risk analysis, rather than just simple endpoint analysis that the FDA uses for class three medical devices, we're very confident that based on the results of this pivotal study, we will be able to file our PMA on our original timeline, and we're also strong in our conviction that we will receive FDA approval. Did that answer your question, Josh?

Josh Jennings, Analyst

That did and thanks for that. Any comment on the safety events or adverse events in either the study group or the control group? I'm assuming you call them out that there really was no difference, but just wanted to clarify that?

Dr. Mike Perry, CEO

Yes, certainly. We did look at adverse events, of course, and there were no differences between the control and the treated arm.

Josh Jennings, Analyst

Excellent. Regarding the vitiligo trial, I'm not sure if you're sharing this, but all patients have completed the follow-up period. How should we expect the presentation of that data? Are there any dermatology conferences scheduled for the latter half of the year, or should we anticipate a press release? Additionally, I was wondering if there are any partnership opportunities you are exploring in commercialization for vitiligo or other areas, whether in the brand space, dermatology, or trauma. Thanks for addressing all the questions.

Dr. Mike Perry, CEO

Thanks, Josh. I'll answer the first question. First on vitiligo, we do have all of the patients completed their six-month endpoints, and we're looking at those data now. So, we're anticipating that we will release those data, top-line data shortly within the coming weeks. And relative to partnerships, either in burns or in vitiligo, at this time, we are still planning for a go-it-alone strategy. That said, we're still going to be opportunistic relative to partnership opportunities, especially if they are going to be accretive to earnings and will look better overall for our revenue slopes and increasing revenues over time.

Operator, Operator

Our next question comes from Matthew O'Brien with Piper Sandler. You may proceed.

Unidentified Analyst, Analyst

Hey, this is Phil on for Matt. Thanks for taking my questions. Just to start here on the guide sort of back half the year. How did your core business do in the first half versus what you're implying in the second half, which is not slow down? Really, you're guiding to about 3% growth for the second half. While you're in this position, any insight into what you see that gives you pause to maybe bring up that guidance a little bit? Thank you. And I've got one more after.

Dr. Mike Perry, CEO

Sure. Thanks for the question, Matt. We wanted to stick with a number that we're confident in, and we are confident in approximately $30 million. The reasons for that, given what we have in our first half of the year, are a combination of seasonality with the business, potential supply chain issues, macroeconomics, the staffing issues that are prevalent in the hospitals, as well as potential COVID flares, which slow things down. So, really with that, we're just holding tight in what we're confident of.

Unidentified Analyst, Analyst

And just one more for me. On those labor shortages, which are ongoing and have been pervasive in the industry, are you seeing any improvements on that front? Any line of sight to when it will be less of a headwind, maybe back half this year or sometime next year? And then if you could reiterate how your new ease of use system is kind of improving that as well?

Dr. Mike Perry, CEO

Sure. Thanks again, Matt. In relation to the labor shortages, we are not seeing an improvement there. The good news is it seems to have settled into at least a level amount, and it's primarily the nursing shortage if we really want to pinpoint it. Our training has increased from 200 a month to 300 a month in order to keep up with the shortages. We feel that that's an additional opportunity for us to get in with the surgeons, and we're turning a difficult situation into an opportunity for AVITA. And as for our ease of use device, we have launched that; that's definitely an advantage that we have relative to the staffing shortages in the hospitals. And that's rolling out well, being well received. We continue to have confidence that this will help us and will move the adoption of RECELL further.

Operator, Operator

Our next question comes from Ryan Zimmerman with BTIG. You may proceed.

Ryan Zimmerman, Analyst

Congrats on the record revenue this quarter. I want to start actually on the burn market though for a moment and just talk about, you referred to some deeper account penetration this quarter. And, Mike, if you could just talk about kind of, are you seeing lower TBSA? Are you seeing higher TBSA? Are you seeing customers stock up ahead of their push to outpatient? Just appreciate the color on the metrics, the step up and utilization amongst surgeons by our math was pretty meaningful quarter-over-quarter.

Dr. Mike Perry, CEO

Thanks for the question, Ryan. We are seeing that our top customers remain stable, and a wider group of customers is using the RECELL device, which is exactly what we aim for. In terms of size, we are not observing a significant decrease in the size of burns being treated. However, the trend is leaning towards smaller burns. When looking at the total body surface area affected, it's challenging to assess. I would say there hasn’t been any major change.

Ryan Zimmerman, Analyst

Okay, I appreciate that. That's helpful color. And turning to Japan for a moment, you talked about reimbursement and pricing by year-end 2022. What line of sight do you have with COSMOTEC in terms of certainty around that from the Japanese PMDA? And how should we think about kind of what we can expect in terms of reimbursement in Japan and whether that's sufficient to drive adoption? And the second part of that is, how do you think about adoption going in and '23 in Japan, assuming you can pick up what you need there?

Dr. Mike Perry, CEO

Sure. Thanks again for that question, Ryan. For Japan, we're hearing very good things from our partner, COSMOTEC, and we do anticipate that we will have reimbursement from the MHLW; discussions are ongoing. We're still optimistic, if not confident, that we'll have reimbursement by the end of this calendar year. Typically, in the U.S., pricing is usually favorable relative to Europe or other countries. Our situation is that based on the reimbursement price we've negotiated, we will receive 40% of that reimbursement price. Our partners are going with a stage in Japan, and they've actually already started teaching with our key opinion leaders in Japan, and we've shipped a number of kits. However, we won't be able to commercialize until we've got that MHLW pricing.

Ryan Zimmerman, Analyst

Fair enough. And I could squeeze in one last one, and then I'll hop back in queue. Gross margins are really nice this quarter, Michael; can you maintain this kind of level of gross margin going forward? That's a nice step up from Q1.

Michael Holder, CFO

Thank you, Ryan, for your question. We do look to maintain these margins here at the low 80% level. So, we should be good with that going forward for the foreseeable future.

Dr. Mike Perry, CEO

Yes, we're good to add to that, Ryan. We're continuing to work on continued cost savings in the context of shipping, which will sustain or increase our gross margins.

Operator, Operator

Thank you. I would now like to turn the call back over to Mike Perry and Michael Holder for any closing remarks.

Dr. Mike Perry, CEO

I want to thank everybody for joining us today in our quarterly meeting. We're very excited about the future and the near-term milestones of submitting PMAs for both vitiligo and soft tissue reconstruction by the end of this calendar year, with approvals in the second half of 2023. With that, again, thank you for your kind attention, and let's close the meeting.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.