Investment Idea

AVITA Medical is a regenerative medicine company leading the development and commercialization of devices and autologous cellular therapies for skin restoration. They aim to become the standard of care in the U.S. burns industry by increasing RECELL system penetration and adoption in burn centers.

The RECELL system takes a tissue sample, which is less than 20% of what's normally required for a skin graft. Then, they disaggregate the cells, place them in a buffering solution (spray-on) that enables accelerated healing where applied.

AVITA's primary competitor in the burns market is the current standard of care, primarily split-thickness autografts. However, based on AVITA's clinical trials, they believe the RECELL System has sustainable competitive clinical and economic advantages over this current standard. In fact, the RECELL System received prioritized review through the FDA's Breakthrough Devices program. The FDA grants the Breakthrough Device designation to medical devices that provide more effective treatment for life-threatening or irreversibly debilitating diseases or conditions. Another metric to demonstrate their product's superiority is gross margin. They currently boast a gross margin around 85%, indicating strong pricing power.

Since the first approval of the RECELL System for treating severe burns in September 2018, Avita Medical's annual revenue has grown tenfold, from $5 million in 2019 to $50 million in 2023. There are still ongoing growth tailwinds for Avita for the next few years, and the company expects to maintain a 50% year-over-year growth rate over the next couple of years as well. Though Avita Medical is not yet profitable, it is in good financial health. It has net cash of $47 million, and the company expects to reach break-even sometime in 2025.


Why we think the RECELL System has the potential to become the standard of care for the burn market

RECEL solutions provides tremendous benefits for both healthcare workers and patients.

(1) It requires less donor skin

Studies supporting the FDA approval of the RECELL System for treating acute thermal burns showed a dramatic reduction in the amount of donor skin needed. When used alone on second-degree burns, the RECELL System required 97.5% less donor skin compared to traditional skin grafting. Even for third-degree burns, where the RECELL System is used with autografting, there was a 32% reduction in donor skin required. Importantly, these studies achieved this reduction without sacrificing healing or safety.

(2) It requires less procedures performed by healthcare workers

The RECELL System reduces the number of surgeries needed to achieve complete wound closure compared to traditional autografting. This translates to fewer procedures for burn patients, potentially leading to faster recovery and reduced healthcare burden.
In pediatric cases, the RECELL System resulted in 56% fewer surgeries on average.
For patients with burns exceeding 50% of their total body surface area (TBSA), the RECELL System reduced surgeries by 60% on average

(3) It has a compelling economic model as well

Studies show that the RECELL System can significantly reduce overall treatment costs for burn patients. Compared to traditional methods, RECELL treatment for deep partial-thickness burns can save an average of 26%, translating to roughly $37,000 for a 10% body surface area (TBSA) burn and $150,000 for a 40% TBSA burn (net of the RECELL System cost). These cost savings come from several factors, including shorter hospital stays, fewer surgeries needed to close the wound, and reduced care for donor skin sites.

Imagine a burn center treating 200 patients a year. A study compared the costs of standard burn treatment to using the RECELL System. The study found that RECELL could save the center around $6.8 million annually. This represents a 17% reduction in total treatment costs, bringing them down from $39.4 million to $32.6 million per year.

RECELL’s potential in the vitiligo market

What makes us more excited is the addressable market in vitiligo.

Vitiligo is a disease that causes the loss of skin pigmentation, or color, in patches. The extent of color loss from vitiligo is unpredictable, can affect the skin on any part of the body, and may also affect hair and the inside of the mouth. Vitiligo cannot be cured at present, and medical treatments generally fall into one of two categories: (1) Treatments to arrest the spread of vitiligo. (2) Treatments to restore pigmentation include skin grafting.

RECELL does not treat the underlying disease. Rather, it addresses the second category only and works to restore pigmentation. The existing treatment method MKTP is effective but is only available in 4 U.S. locations due to complexity and the procedure is also lengthy (3 hours). RECELL is a similar procedure, however, it can be done in as little as 30 minutes, in any dermatology setting. Compared to MKTP, RECELL is essentially a lab in a box that can be easily distributed.

Following the FDA approval, RECELL would be the first point-of-care device for preparation of pigment cell suspension which could offer a single application treatment for patients with stable vitiligo. Avita medical estimates that there are approximately 1.3 million people in the U.S. with stable vitiligo who would be both eligible and interested in a surgical approach which equates to a total addressable market of over $5 billion. The RECELL treatment for vitiligo is initially anticipated to be provided by a vitiligo specialist and surgical dermatologist in the office setting and management estimate that this will likely not exceed 1,000 physicians. Approximately 188,000 vitiligo patients who have insurance or the ability to pay are likely at those target call points, and this equates to a serviceable market opportunity of approximately $750 million.  

This addressable market is in U.S. only and Avita medical is actually making plans to distribute its product internationally as well and that will provide additional growth tailwind for the company.

Valuation

With strong growth expected in the next couple of years, we attempted to look ahead to model the company’s financial performance.
We expect 50% YOY growth due to the FDA approval for its use in full thickness treatment, vitiligo treatment and international market growth. In our model, we assumed a 40% YOY growth in Sales&Marketing in 2024 and then this cost decelerate to 10% YOY to reflect the initial sales ramp. We also assumed 10% YOY growth in General and administrative to reflect higher head count. We modeled the research and development cost to be flat as there is no additional work/experiment going on for Recell system.