Avita’s First-Quarter Sales Growth Compensates for Margin Contraction

Business Strategy & Outlook

The Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. The Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

Despite the technology in Avita’s RECELL system being in use since the Bali bombings in 2002, the product has had limited commercial success as it entered the market as an investigational device. This limited the reimbursement and take-up of the product. RECELL relaunched in the U.S. following randomized clinical trials and FDA approval in late 2018. Currently, it’s approved for treating second and third degree burns in pediatric and adult patients.

The treatment of severe burns in the U.S. is concentrated across the 136 burn centers, making commercial roll-out of RECELL straightforward. Of the approximately 14,000 adults with second- or third-degree burns treated at these burn centers each year and Avita could ramp-up to 34% share or 4,800 patients per year by fiscal 2026. The cost of RECELL compares favorably with a skin graft in this setting, as RECELL has a list price of USD 7,500 per single-use unit versus the USD 17,000 to USD 20,000 cost of a skin graft. It also has the benefits of shorter length of stay and fewer

additional procedures.

Outside of burn centers, the opportunity set is far more fragmented and because the burns are less severe, the cost of skin grafts average USD 2,000. As such a limited take-up outside of burn centres, reaching 3% by fiscal 2031. Avita has received regulatory approval for an updated RECELL device that makes handling easier in a regular hospital environment. The company will seek to justify reimbursement on a holistic cost of treatment and roll out the updated version in second-half fiscal 2022.outpatients.

Financial Strengths

Having raised AUD 120 million in equity funding in November 2019, and a further USD 69 million in February 2021, Avita is in a solid financial position with no debt, and USD 95 million in cash and marketable securities as at March 31, 2021. Based on roll-out and product launch dates, no one can expect Avita will need to raise further capital before becoming self-maintaining. The operations of the company to be a net consumer of cash in fiscal years 2022, 2023, and 2024 as it scales up operations, and become free cash flow positive thereafter. Key operational cash requirements include the salesforce and clinical trials and approvals for new indications. There

is little capital investment required as the owned factory where it assembles the RECELL systems in the U.S., is currently running at only 10% capacity. Consequently, one cannot expect it will require additional physical space for the next five years. Avita does not pay a dividend and one cannot forecast this to change. The company will become free cash flow positive in the forthcoming years, it will choose to reinvest this either in expanding geographies or new indications outside the scope of the current trials, such as cosmetic dermatology.

Bulls Say

The Avita’s RECELL system as a sound alternative treatment for large second- and third-degree burns treated in burn centers. It compares favorably on price and ease of use with new products and the existing standard of care being skin grafts.

The company requires little invested capital and is expected to generate very high returns once it ramps up its commercial roll-out.

RECELL has achieved an estimated 20% market share in fiscal 2021 in its key addressable market since launching in 2019 and set to expand its use for other indications.

Company Description

Avita is a single product company. Its RECELL system is an innovative burn treatment device which creates Spray-on Skin from a small skin sample within 30 minutes, thus avoiding or reducing the need for skin grafts. It’s approved for the treatment of adult patients in the U.S. with pediatric clinical trials and expanded indications in soft-tissue reconstruction and vitiligo underway. It is currently in roll-out across the approximately 136 U.S. burn centers. Despite having product approval in Australia, Europe, Canada, and China, Avita is not actively marketing in those territories and focusing instead on the U.S. region. However, it is expected to launch in Japan via distribution partner Cosmotec in second-half fiscal 2022. Avita is domiciled, and has its primary listing, in the U.S.

(Source: Morningstar)

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