Company Overview: Avita Medical Limited is a medical technology company. The principal activities of the Company are the commercialization of its regenerative product. The Company has three segments: the Asia Pacific region; the Americas, including Canada, and the Europe, Middle East and Africa (EMEA) region. It develops and distributes regenerative products for the treatment of a range of wounds, scars and skin defects. Its collection and application technology provides treatment solutions derived from the regenerative properties of a patient's own skin. The Company's product, ReCell, is used in the treatment of a range of burns, plastic, reconstructive and cosmetic procedures. Its technology, Regenerative Epithelial Suspension (RES), is an autologous suspension composed of the cells and wound-healing factors necessary to regenerate natural skin. The Company also offers ReGenerCell, which is used for the treatment of wounds, and ReNovaCell, which is used for the treatment of pigmentation.
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AVH Details
Exceeding Expectations For The U.S. Launch Of The RECELL System: AVITA Medical Ltd (ASX: AVH) happens to be a regenerative medicine company which is having a technology platform and is positioned to address the unmet medical needs in burns, chronic wounds, and aesthetics indications. As on May 3, 2019, the market capitalisation of AVH stood at ~A$652.55 million. The company had recently released its results for the quarter ended March 2019 i.e. Q3 FY 2019 in which it stated that the active sales and marketing of RECELL System in the U.S. for treatment of the acute thermal burns started with the January 2019 national market launch. As a result, these results reflect the first three months of promotion for the product. The Total product sales amounted to A$2.36 million in Q3 FY 2019 as compared to A$0.238 million in the same period of previous year. In Q3 FY 2019, the company’s total revenue amounted to A$4.70 million as compared to A$1.73 million in the same period of previous year.
Key Metrics for Q3 FY 2019 (Source: Company Reports)
The top management of the company had stated that they have exceeded the expectations with respect to the U.S. launch of RECELL System added that the sales doubled during the quarter compared to the prior quarter. The company added that the Q3 FY 2019 reflects first three months of the market launch, and there has been quick uptake of RECELL System by the burn centers that have been first movers in the product adoption.
Moving forward, increasing revenue growth rates (FY 2016-FY 2018) and strong liquidity position (as evident from the current ratio at the end of 1H FY 2019) might gain traction among the market players.
Top 10 Shareholders: Following table gives a glimpse about the top 10 shareholders in AVITA Medical Ltd which highlights that 13.41% is being held by Redmile Group, LLC.
Top 10 Shareholders (Source: Thomson Reuters)
Improvement in Key Margins, Current Ratio Higher than Industry Median: AVITA Medical Ltd had witnessed significant improvement in its key margins in 1H FY 2019 on the YoY basis which reflects decent performance over the period and further builds the confidence on the company’s core business activities. Moreover, the company enjoys virtual debt-free status along with decent cash & cash equivalent reserve of $30.342 Mn (as at 31 December 2018). The current ratio and quick ratio stood at 6.97x and 6.74x which are higher than the industry median of 2.80x and 2.29x, respectively in 1HFY19, indicating better position to address the short-term commitments. This equates that the company has sufficient headroom of making investments to achieve the long-term growth objectives moving forward.
Key Ratio Metrics (Source: Thomson Reuters)
Featuring of RECELL System: The burn center professionals made 10 presentations in which they described RECELL System at American Burn Association (or ABA). It was mentioned that Pediatric patients with the mixed and full-thickness burns treated with a combination of Spray-On Skin™ Cells prepared with the help of the RECELL System and widely meshed autografts witnessed excellent healing outcomes as 98% of wounds were healed four weeks post the treatment. The Health economic data had projected that the usage of RECELL System to treat the patients having severe burns can save up to US$28 million annually as compared to the treatment with standard of care at the Arizona Burn Center.
An In-Depth Look at Q3 FY 2019 Results: In Q3 FY 2019, the total cash receipts of AVH amounted to A$4.84 million which implies a rise of A$2.01 million or 71% on prior quarter which ended on December 31, 2018. The company’s cash receipts from the customers amounted to A$2.51 million in Q3 FY 2019 implying a rise of A$1.65 million or 193% as compared to the prior quarter on the back of commencement of the U.S. national market launch of RECELL System.
Net Cash Used in Operating Activities (Source: Company Reports)
The cash received from BARDA in Q3 FY 2019 amounted to A$1.72 million reflecting a fall of A$0.251 million or 13% as compared to the prior quarter which was because of the wind-down of certain activities which were associated with supporting the U.S. FDA approval of RECELL System as well as Compassionate Use and Continued Access programs. In Q3 FY 2019, the payments associated to sales and marketing, staffing, administrative and corporate costs amounted to A$9.57 million which reflects A$0.611 million or 7% increase as compared to the quarter ended December 31, 2018 and was largely because of November 2018 hiring of the U.S. sales force for the commercialization of RECELL System where the team was in place for the entire Quarter ended 31 March 2019. The company’s total net cash used in operating activities in Q3 FY 2019 amounted to A$6.48 million which reflects an A$0.102 million or 2% decrease as compared to the quarter ended 31 December 2018 and was because of a rise in total cash receipts partially offset by the increase in the payments for operating expenses.
Healing of Donor Sites Post Treatment Using RECELL System: A presentation “Healing of Donor Sites with Autologous Skin Cell Suspension Enables Early Reharvesting for Large TBSA Burn Injuries: A Prospective Evaluation” gave an understanding of the treatment of donor sites in the patients having large TBSA burn injuries.
In the prospective observational study of 73 subjects with thermal burn injuries treated under the Compassionate Use program, 426 donor sites wounds were treated with Spray-On Skin™ Cells prepared with the help of RECELL System. The mean TBSA of patients in the study stood at 54% and the burns ranged from 20% to 91% TBSA. Two weeks post the treatment, 91% of the donor sites had healed in the compromised patient population, and 98% had healed by week eight. Donor sites treated with the help of the RECELL System were able to be reharvested as early as seven days after the treatment.
Treatment of Patients Having Burns More Than 50% TBSA: The use of RECELL System in combination with meshed autografts gets definitive closure for the patients having burn injuries of more than 50% TBSA and achieved comparable outcomes to patients with less severe injuries in the presentation named “Evaluation of Autologous Skin Cell Suspension (ASCS) for Definitive Closure of Extensive Burn Injuries in an Adult Population.” The use of RECELL System, which is a donor skin sparing technology that enables rapid definitive closure, can improve patient outcomes.
The purpose of the study revolved around evaluating clinical outcomes for the patients having more than 50% TBSA burn injuries, in which RECELL System was used in combination with widely meshed split-thickness autografts to achieve definitive closure using minimal donor skin. For the patients with more than 50% TBSA burns, 150 burn wounds were treated with the combination of Spray-On Skin™ Cells and widely meshed split-thickness autografts and 95% of the wounds achieved complete wound closure two months post the treatment.
Easy Accessibility of US Burn Market: AVITA Medical had stated that the U.S. burn market happens to be highly concentrated which makes it easily accessible. There are 134 burn centers and 300 burns surgeons in the U.S. It added that burn centers witness 65 times more burn hospitalizations than in the general hospital setting. The RECELL System has decent penetration in the US as 24 burn centers had already experienced the RECELL System at time of FDA approval which reflects 30% of the patients treated in the U.S.
The company stated that the use of RECELL System can reduce the treatment cost by 44% or more in the patients having large burns. Also, RECELL is positioned for the successful adoption in the US Burns during 2019. On the backdrop the company’s RECELL System which is designed for the treatment of chronic wounds is anticipated to provide considerable growth opportunity.
What To Expect From AVH Moving Forward: AVITA Medical had stated that, in Q3 FY 2019, there has been quick uptake of RECELL System by the burn centers that have been the first movers in adopting product. It added that beyond the early adopters, the experience shows that many of remaining burn centers would be following more standard process with respect to adopting RECELL System, which includes an initial evaluation of the product and advancement through their hospital’s Value Analysis Committee (or VAC), before going forward with the formal decision to purchase for the regular use. The process might take six months or more to complete.
AVH stated that cash requirement for the future would be dependent on the success of its efforts to commercialize RECELL System, primarily in the U.S., and the timing as well as magnitude of clinical and other research and development programs which the company chooses to undertake in order to expand the product pipeline. Till the time AVH generates sufficient cash flow from operations and there are expectations that it would be financing the future cash requirements via combination of the current cash resources, and potentially the issuance of shares as well as debt financing.
Key Valuation Metrics (Source: Thomson Reuters)
Stock Recommendation: The stock of AVH had given the return of 180% in the span of previous three months, while in the time frame of previous one month, it posted the return of 16.67%. The company’s top line has witnessed the CAGR growth of 20.22% over the 4 years to FY 2018 (i.e. FY 2015-FY 2018) which might attract the attention of market players. Also, the company’s revenue growth rate has been increasing from the past three years to FY 2018 (FY 2016-FY 2018) which reflects positive revenue-generation capabilities of the company. However, the stock is having a P/B ratio at 18.51x which is higher than the peer median of 5.94x. Nonetheless, and as shown in the chart below, A$0.329 has been estimated as the support level of AVH’s stock while A$0.411 has been estimated as the resistance level. We note that the company has a decent outlook on the back of strong cash position to meet its business objectives, its effort in launching the RECELL System in the US and increasing top-line growth from the past few years. We, therefore, give a “Speculative Buy” recommendation on the stock at the current market price of A$0.355 per share (up 1.429% on 3rd May 2019), while it is inching towards a higher level.
AVH Daily Chart (Source: Thomson Reuters)
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