Avita's AVH fourth-quarter 2024 commercial revenue of USD 18.4 million declined 6% on the third quarter but is in line with our forecast for the full year. This resulted from some customers adjusting inventory levels and was previously flagged. We do not foresee this affecting Avita’s long-term opportunity. New orders were deferred late in the year, as is typically the case, but they resumed in early 2025. We leave our fiscal 2025 sales forecast of USD 101 million unchanged, within management’s USD 100 million to USD 106 million forecast, and implies 57% growth on the prior year driven by recent product launches. We maintain our $5.40 fair value estimate for no-moat Avita Medical.

Shares are undervalued as the firm nears profitability. We expect Avita’s international expansion plan in Europe and Australia and recent product launches to help provide a path to positive cash flow by late calendar 2025, in line with management’s expectation of hitting the milestone in fourth quarter 2025. 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.

The key highlight of the result was fourth-quarter operating expenses declining 14% sequentially on the third quarter to USD 26 million, largely on reduced administration expenses. This translated into cash burn of USD 8 million in the fourth quarter versus USD 10 million in the third quarter. We expect cash burn to continue improving, allowing the firm to be self-sufficient before reaching profitability. We don’t expect additional funding requirements, with USD 36 million in net cash and marketable securities as of Dec. 31, 2024, and the firm has access to debt facilities if needed. We expect Avita to be cash flow positive in 2026.

Business strategy and outlook

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 centres, making commercial rollout of RECELL straightforward. Of the approximately 14,000 adults with second- or third-degree burns treated at these burn centres 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 favourably 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 centres, 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 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. 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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