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Avita Medical AVH
February 22, 2019 - 3:59pm EST by
nilnevik
2019 2020
Price: 0.13 EPS 0 0
Shares Out. (in M): 2 P/E 0 0
Market Cap (in $M): 207 P/FCF 0 0
Net Debt (in $M): -37 EBIT 0 0
TEV (in $M): 170 TEV/EBIT 0 0

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Description

Above metrics in AUD and share count from Jan-19 presentation (ADR trades under AVMXY, 20:1)

 

AVITA Medical is currently launching a revolutionary product for burn wound patients that is significantly cheaper and more effective than existing standard of care (SOC). This is the first major burn advancement in the last 25 years. While the stock does not screen well given the current cash burn/lack of revenue/lack of coverage, the company officially launched in January after commercial approval (prior to this, it derived most cases from compassionate use/BARDA funding). We believe this is an easy 2-bagger and potential 10-bagger if the product migrates into aesthetics from purely burn care. The company has enough cash given recent equity raise to run until product break-even while funding clinical programs.

 

Why Standard of Care (SoC) is Lacking

  • Current SoC is Split-Thickness Skin Grafts (STSG) – a skin graft is a piece of unburned skin surgically removed from a donor sire on the patient’s body (in the OR) and used to cover a burned area of the body
    • Currently used in 75% of cases
  • Issues:
    • Significant burns require large donor areas
    • Significant pain during and after the skin grafting procedure
    • Extended hospitalization (=SIGNIFICANTLY MORE COSTS)
    • Risks of infection

       

       

  • Timely treatment is vital for all burn patients (skin is the body’s protection)
  • Average cost - $792,000 and 59.4 days in the hospital for 40% Total Burn Surface Area (TBSA) burn

AVITA’S SOLUTION: RECELL

  • RECELL is an autologous (obtained from same individual) cell harvesting device that uses proprietary enzyme and buffer formulations to generate a “spray-on skin” replacement within 30 minutes
  • Device is single-use, sterile, self-contained and delivers skin regeneration at the point-of-care
  • RECELL can cover treatment area 80x than the donor site  (=significant reducing donor tissue)
  • Skin sample the size of a credit card can be used to treat a patient’s entire back
  • 7,000+ uses with no observed safety signals
  • FDA approved RECELL on September 20, 2018

Clinical Results

  • There has been two multicenter, randomized, controlled clinical trials (131 patients) and results have been stellar
    • Pivotal Trial #1 RECELL vs. SOC (STSG) in Second-Degree Burns
    • Pivotal Trial #2 RECELL with widely spaced SG Versus SOC (STSG) in Third-Degree Burns

Efficacy - Significant Enthusiasm to Adopt this in Practice

  • Expert 1 (treating burns for 11 years):
    • 100% success rate over >200 cases
    • Believes over half of his patients with >20% TBSA (total body surface area) will receive RECELL
    • Believes 14k target is too low and closer to mid 20k
    • Each kit is $7,500, and large burns require 2-3+ kits (CFO indicates one kit for 10% TBSA); when asked about pricing, said would make sense both financially (cheaper) and timewise (1 surgery instead of 3-4 required for large skin grafting procedures)
    • Believes will become SOC
  • Expert 2 (director of burn center)
    • 100% success rate
    • Believes best tech in market, no real advances in 20-25 years; hard to distinguish pigmentation from native skin after healing
    • Will try to use RECELL on 100% of large burn patients; once providers learn how to use it pretty much would use RECELL on all cases
    • Trying to shift most of his patients to RECELL, would likely use on small burns as well
    • Also believes addressable market in the mid 20k
  • Expert 3 (Prof of surgery)
    • RECELL reduces number of procedures required immediately, by one quarter
    • No failures
    • Would use RECELL on a quarter of patients in the following year, as comfort and results come in, would expect this to rise to 25-50+%

Total Addressable Market

  • Based on CDC and American Burn Association (ABA), there are 1.1 million burn injuries that require medical attention in the US every year
    • Roughly 500,000 of those people are treated and 50,000 require hospitalization (general hospital + burn centers)
    • Around 32,000 will be patients at burn centers
  • RECELL will focus on patients with 10%+ TBSA = 14,000 patients annually

Pricing and Revenue Opportunity

  • RECELL is priced for broad market adoption regardless of large or small burns
    • Significant discount to competing and developing products
  • Health Economic models demonstrate that RECELL can reduce overall hospital costs through reduced hospital stay + fewer procedures
  • ABA provided recommended Current Procedural Terminology (CPT) Codes within one week of approval (ensures physician payment)
  • ICD-10 Code (Hospital Payment), reimbursement guidelines and customer services lines have all been established

 

Why the Ramp Should Be Fast

  • Commercialization strategy of using a direct sales force (vs. distributor model)
  • Very concentrated call-point. The US has only 134 burn centers with 300 total burn surgeons (burn centers see 65x more burn hospitalizations than in general hospital)
    • Through its clinical trials and compassionate use programs, RECELL is already being used in 24 (19%) of those 130 burn centers
    • Their current burn centers are the larger ones (includes #1 and #2), which represent 30% of patients treated with burns
  • Focused manner of care creates a very tractable market for a direct sales force
  • So far, HALF of all US burn centers have been in discussions with RECELL sales force + 36 burn centers have begun authorization process with hospital administration

 

Revenue Build

  • Clear path towards $40m off the bat with a dedicated sales force and concentrated call-point of burn centers
    • Assuming a 15% capture rate and 2.5 kits / user, we think the company can do $35 million in revenue in the short term (0-24 months), with some additional low million from <10% TBSA use. Using a 10x multiple on this, we think the company has 2x upside against current trading levels
    • Over time, we don’t think it’s unlikely that RECELL becomes the SOC as comfort-level around usage of it increases (and cost savings are proven). Over 5+ years, RECELL captures 40-50% of burn patients. This would result in revenues of ~$200 million. We think the company is probably worth 6-8x revenues then, as it will continue to have OUS markets and aesthetics markets to address (5x upside discounted back)
  • Upside to that valuation depends on pediatrics burn adoption as well as aesthetics care, which constitute a market that is equal in size to the adult burns. See upside opportunities below.

Barriers

  • Number of aspects including enzyme formulations; Number of patents (Composition of matter + usage) from 2024 to 2032
  • Will have massive head start regardless. Competitors need to take the PMA pathway and there is no one in development right now - start to approval will take 5 years.

 

Why OUS Has Been Weak

  • Approvals in Australia, EU and China were only based on case studies
  • In order to get deep penetration and adoption you need hard clinical data, not just compassionate use stories
  • For the first time, Avita has randomized, controlled clinical trials with robust data on both clinical benefit and health economics

Catalysts

  • ADR listing in 1Q18 = More Sellside Coverage (only 2 brokers cover it now; Lake Street and Bell Potter)
  • 2019 ABA Meeting April 2-5
  • US Launch and Revenue Growth Updates

Misc.

 

Upside Opportunities

  • Pediatric Opportunity (LESS SKIN SURFACE AREA = NATURAL FIT FOR RECELL)
  • Traumatic Wounds (1/3 of all skin grafts are trauma related)
  • Vitiligo (LT Skin loss pigmentation / Hypopigmentation, >10m patients in the US and China)
  • Cell-based skin gene therapy
  • Skin Aesthetics ($22bn market opportunity)

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts

  • ADR listing in 1Q18 = More Sellside Coverage (only 2 brokers cover it now; Lake Street and Bell Potter)
  • 2019 ABA Meeting April 2-5
  • US Launch and Revenue Growth Updates
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