No-moat Avita Medical AVH downgraded its fourth-quarter 2024 commercial revenue guidance by 21% to USD 18 million. It now expects full-year commercial revenue of USD 64 million compared with its previous guidance of USD 68 million-USD 70 million. The downgrade implies fourth-quarter 2024 commercial revenue declining 6% on third quarter 2024's. We have cut our 2024 revenue forecast by 6% to USD 65 million but leave our long-term estimates unchanged. We keep our $5.40 fair value estimate with the time value of money and a stronger US dollar offsetting our near-term downgrade.

Avita’s downgrade was attributed to several customers adjusting inventory levels at year-end, resulting in reduced purchasing in December 2024. This behavior is typical, with sales in fourth-quarter 2023 being broadly flat with third-quarter 2023, but the extent was more pronounced than expected. Nonetheless, we do not see this hurting Avita’s long-term opportunity. We leave our fiscal 2025 sales forecast of USD 101 million unchanged, implying 55% growth on the prior year on recent product launches. This compares with management’s fiscal 2025 commercial revenue guidance of USD 100 million-USD 106 million.

The shares plunged close to 17% after the announcement but remain are undervalued. We expect Avita’s expansion plan in Europe and Australia to help provide a path to positive cash flow by late 2025, in line with management’s slightly revised expectation of hitting the milestone in fourth quarter 2025 from third quarter 2025 previously. However, a quicker transition to profitability is unlikely, and there is a wide range of potential outcomes based on the success of its vitiligo indication, which is reflected in our unchanged Very High Uncertainty Rating.

Cash burn was USD 10 million in third quarter 2024. We expect cash burn to continue improving into the single digits, allowing the firm to be self-sufficient before reaching profitability. Avita recorded USD 44 million in net cash as of Sept. 30, 2024, and has access to debt facilities if needed.

Avita’s road to profitability is long, but it continues to take the right steps

We expect 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. We believe 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 US following randomized clinical trials and Food and Drug Administration approval in late 2018. Currently, it's approved for treating second- and third-degree burns in paediatric and adult patients.

The treatment of severe burns in the US is concentrated across the 136 burn centers, making commercial rollout of RECELL straightforward. Of the approximately 14,000 adults with second- or third-degree burns treated at these burn centers each year, we estimate 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, we expect limited take-up outside of burn centers, reaching 3% by fiscal 2031. Avita has received regulatory approval for an updated RECELL device that makes handling easier in a regular hospital environment. We expect the company will seek to justify reimbursement on a holistic cost of treatment and roll out the updated version in second-half fiscal 2022.

Avita bulls say

  • We view 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.

Avita bears say

  • Avita is still burning cash and the road to profitability depends on clinical readouts for further indications over the next few years, with the use of RECELL currently limited to adult and paediatric patients at burn centers.
  • The RECELL system is an assembly of tools with the only significant item being the vial of enzymes, so the effective price for the vial at a list price of USD 7,500 could be challenged by reimbursers.
  • The existing patents do not provide extended cover as expiries range between 2024 and 2034, and the very high gross margin of over 80% could come under pressure.

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