AVITA Medical, Inc. (NASDAQ:RCEL) Q3 2023 Earnings Call Transcript
AVITA Medical, Inc. (NASDAQ:RCEL) Q3 2023 Earnings Call Transcript November 9, 2023
AVITA Medical, Inc. beats earnings expectations. Reported EPS is $-0.34, expectations were $-0.53.
Operator: Good day, and thank you for standing by. Welcome to the AVITA Medical Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Jessica Ekeberg, Director of Investor Relations. Jessica, please go ahead.
Jessica Ekeberg: Thank you, operator. Welcome to AVITA Medical's third quarter 2023 earnings call. Before we begin, let me remind you that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements. Please review AVITA Medical’s most recent filings with the SEC, specifically the risk factors described within Form 10-Q for the quarter ended September 30, 2023 for additional information. Any forward-looking statements provided during this call are based on management’s expectations as of today.
AVITA Medical’s press release for the third quarter 2023 results is available on our Web site, www.avitamedical.com under the Investor Relations section. A recording of today’s call will be available on our Web site by 5:00 PM Pacific Time today. Joining me on today’s call are Jim Corbett, Chief Executive Officer; and David O’Toole, Chief Financial Officer. I will now turn the call over to Jim for his comments.
Jim Corbett: Thank you, Jessica. Good afternoon. And thank you for joining us today. I will begin today's call by discussing highlights of the third quarter, followed by an update on priorities. Following this update, I will turn the call over to David, who will provide commentary on our financial performance for the quarter. I'm pleased to relay that our team drove third quarter commercial revenue of $13.5 million, representing a 51% increase over the same period in 2022 and marking our highest quarterly growth rate over the prior year. This achievement underscores our commitment to sustained growth. Our burns business continues to drive our growth as it has all year. However, we could not achieve these results without the substantial contribution from revenues stemming from full thickness skin defects.
I'll provide an update on this launch shortly. Moving on to our top priorities and recent activity. During the first quarter, I committed to defining our international expansion strategy during this earnings cycle and after months of strategic planning, I'm excited to unveil our plans today. Before doing so, I want to give credit to Terry Bromley, our Senior Vice President of Global Sales, who is leading our international efforts in addition to his US responsibilities. First, our team has defined a focused international market for AVITA Medical. As we surveyed the globe, we looked at countries with sizable populations, robust healthcare systems and the resources to invest in our technology. These three factors are key because our device is not just a product you can export without training into an unstructured healthcare system.
To ensure proper device use and to have a meaningful impact on patients, trained medical professionals within a well established healthcare system and strong economic support for treatment are fundamental requirements. When we apply these filters, the prime prospects are Australia, Japan and most of the European Union. Now, let's explore the plan to expand into the countries we have identified. As we weighed the advantages of internal sales channels versus indirect sales models, it became evident that the third party distribution model aligns best with our needs and provides the most benefits. The overarching advantages to this strategy center around knowledge, access and economics. First, we will benefit from local knowledge of distribution, reimbursement and commercial strategies within our targeted markets.
Consequently, we will be able to leverage third party expertise to access these markets more effectively and rapidly than if we were to build out new distribution channels within our organization. Lastly, since we are not establishing international channels through our own subsidiaries, this strategy will be a net contributor through our operating margin almost immediately. Terry and the team have already made great strides in our new expansion efforts. In fact, I am pleased to announce our newly hired Vice President of Europe, Stephane Cotte. Stephane, reporting to Terry brings over 25 years of global sales and marketing and services experience in the medical device industry, having most recently served as Vice President of Global Marketing at ConvaTec.
Additionally, this morning, we announced our first European partnership with PolyMedics Innovations, a German based company specializing in the commercialization of innovative biomaterials and systems for wound treatment. Under our agreement, PolyMedics will be responsible for our expansion in Germany, Austria and Switzerland with an option to expand to additional European markets in the future. Founded in Germany in 2001, PolyMedics introduced its first product, a synthetic skin substitute to Germany and Austria in 2004. Today, their two flagship products are distributed across over 40 countries worldwide. PolyMedics maintains a specialized sales team focused on burns and trauma, aligning seamlessly with the targeted procedures for resale.
In fact, many resale procedures already utilize PolyMedics’ synthetic skin substitute, making RECELL a complementary solution to their existing customer call points. We expect to commence training with PolyMedics before the end of the year, paving the way for a planned launch on the 2nd of January, 2024. Going forward, we plan to actively identify new distributor partnerships over the next six to 12 months to approach the markets that have been identified. I will provide updates during future calls. Turning to the PMA supplement for RECELL GO. In September, the FDA requested additional information on day 90 of the 180-day review cycle under the FDA's breakthrough device program. This request for additional information paused the clock on day 91.
Upon receipt, we immediately began to prepare and submit a complete response to the FDA. Questions broadly fell into three categories. The first category, representing a majority consists of clarification questions that we were able to address within several days. On the other hand, the second and third categories require additional in house testing to fulfill the FDA's request. We've made incredible progress developing the data plan for the testing. In fact, all testing is already underway. Consequently, we now expect to complete the data set and submit our response to the FDA on February 28, 2024. Upon submission, the 180-day real time review resumes on March 1, 2024, positioning us for approval 90 days later on May 30, 2024 with an expected launch the following day.
The first area of testing focuses on human factor testing associated with the use of RECELL GO at different sites of service. The second area of testing in broad terms aims to establish the comparability of the autologous cell suspension between the current and the more controlled methodology of RECELL GO. Two examples here include the characterizing of the pressure used to disaggregate cells and the soak time needed in the process. To date, over 17,000 cases have been performed under the current method of creating the autologous suspension. As one would expect, there is tension variability across the hundreds of surgeons who have implemented the current device using their individual hand pressure. Second, the soak process is currently 15 to 30 minutes.
But with RECELL GO, it will be 25 minutes each and every time. RECELL GO aims to control the variability introduced from these steps. We remain confident that the additional testing in progress will provide the FDA with sufficient responses to their questions. In connection to RECELL GO, I had previously mentioned that we co-developed the durable device and disposable cartridge with the contractor who performed the initial development and manufacturing. Earlier this year, we made the strategic decision to move the entire manufacturing and assembly process in-house to our Ventura facility. Originally, we had planned to launch RECELL GO simultaneously with the transition of manufacturing to our facility in Ventura. An unintended benefit of the delayed launch is that it allows us to complete the manufacturing transfer to our Ventura facility ahead of the commercial launch.
We look forward to sharing further updates on our expanding manufacturing and assembly environment. I'd like to turn to the recent progress we have made with full-thickness skin defects. As I mentioned earlier, we did see an expansion in revenue following approval of the indication. Currently, we have over 100 accounts at various stages within the adoption process. Some are still with the value analysis committee, while others are performing or have completed their initial cases and are on track for broader adoption. One interesting takeaway from our initial launch pertains to the broad scope of the expanded label for full thickness skin defects, which allows us to pursue many different applications and forms of skin grafting. Consequently, we have found we have access to a wider user base within a single facility than initially anticipated, often resulting in a lengthier sales process compared to that of burns, but a much larger market.
In fact, a few weeks ago, I had opportunity to observe a top burn surgeon perform a full thickness skin defect procedure on a road rash patient at a medical center, the expanded label represents a tremendous opportunity within a dynamic environment and we continue to affirm that this indication has high growth potential in a market that is about 10x the size of burns. Turning now to our cash position. In October, we announced that we secured up to $90 million of non-dilutive debt financing with OrbiMed. With several near term initiatives on the horizon, the capital serves as a backstop to our cash position, allowing sustained growth and expansion. We strategically pursued a debt financing to avoid significant dilution to our shareholders due to the uncertain equity market conditions that have existed in recent times.
Additionally, we are confident this financing provides us with sufficient capital to achieve our growth goals and position us to reach profitability during 2025 without the near term need for additional equity financing. While we do not have the explicit need for the two additional tranches of $25 million each. Having access to this capital provides us with valuable flexibility and optionality. We firmly believe our partnership with OrbiMed is the most shareholder friendly approach to strengthening our cash position. David will discuss the financial details of the transaction. One detail I'd like to underscore is that in the past communications, we have said that we expected to reach profitability in 2025 subject to a vitiligo channel investment.
Today, we are eliminating that vitiligo expansion qualifier, further evidencing our bullish view on the growth and profitability of our company. Let me now provide an update on the vitiligo initiative. As we have mentioned previously, we are in the process of securing reimbursement for vitiligo. To begin this process, we have initiated a 100-patient post market study called TONE. TONE will evaluate repigmentation using the RECELL device and will also seek to measure quality of life after treatment of stable vitiligo lesions. The three quality of life measures are patient satisfaction, clinical satisfaction and patient mental health. We believe developing these quality of life indicators will help create a basis to understanding the impact of vitiligo on the mental health of the patient and the associated healthcare costs of treatment.
We expect full enrollment of TONE by the end of February 2024. The trial design then includes six months of patient follow-up. With that in mind, we expect to submit for publication by the end of 2024. Additionally, to support reimbursement, we are in the process of initiating a separate health economics study to capture the longitudinal healthcare costs for a vitiligo patient. For this study, we will collaborate with a leading healthcare economics firm and a team of physicians for guidance. We expect to publish this study by Q4 2024. Collectively, we believe that these studies will demonstrate how treating vitiligo with RECELL can significantly reduce the lifetime healthcare costs of patients. As we work to establish reimbursement, it's important to appreciate that CMS will play a limited role given that the vitiligo patients are an average age of 40 years old and are not Medicare beneficiaries.
Consequently, we will focus on commercial payers who will stand to benefit economically by providing coverage of RECELL for the repigmentation of stable depigmented vitiligo lesions. The study publication dates put us in position to begin payer coverage discussions in Q1 2025. It is also important to recognize that commercial coverage decisions are geographically determined by state and/or region. As such, we will focus on larger populated states first, where insurance is governed by state law. This will result in a rolling launch of vitiligo. We will update you on our progress with the two studies and with the major policy payers throughout 2024 and 2025. Given the phased rollout caused by reimbursement timing, we will not expand our commercial team in advance.
We anticipate that the initial phase of reimbursement coverage will likely begin regionally as coverage is established in Q3 2025 with the appropriately sized commercial support as coverage is established. From a portfolio point of view, we are looking to expand our strategy. We plan to become a full scale wound care company. Accordingly, we are actively evaluating dermal scaffolds, skin substitutes and wound dressings for co-development opportunities. Currently, we are performing early animal work and will keep you informed of our activity and progress in this area. Looking ahead, there are a number of exciting topics that we will discuss in February on our 2023 annual results call. As standard, we will provide guidance for the quarter and for the full year 2024.
Additionally, we will provide guidance on the quarter in which we will reach cash flow breakeven without the expressed limitation of the 2025 vitiligo sales channel or any other limitation. Lastly, we also provide detail on our ongoing commercial expansion efforts. As previously mentioned, we plan to maintain small sales territories as determined by geography and revenue to keep our growth rate high. In closing, we remain committed to unlocking shareholder value through the continued growth into our expanded indications and the expansion of our portfolio. I look forward to sharing updates on our progress. With that, I'd like to turn the call over to David.
David O’Toole: Thank you, Jim. Good afternoon. We delivered another strong quarter of financial results. In the three months ended September 30, 2023, our commercial revenue increased by 51% to $13.5 million compared to $9 million in the same period in 2022. As a reminder, beginning in Q1 of this year, we have achieved significant commercial revenue growth rates of 40%, 42% and now 51% for the current quarter compared to the same quarters in the prior year. The increase in commercial revenue for the current quarter was largely driven by broader surgeon usage as well as deeper penetration, especially within smaller burn procedures. Additionally, our launch into the full-thickness skin defects market and the subsequent and continuing acquisition of new accounts through our expanded label contributed to our revenue growth.
Gross profit margin was 84.5% for the quarter compared to 83% in the same period in 2022. The gross profit margin for the quarter was at the higher end of our full year guidance of 83% to 85% that we provided last quarter. Total operating expenses for the quarter were $21 million compared to $14.2 million in the same period in 2022. The increase in operating expenses is primarily attributable to an increase of $5.1 million in sales and marketing cost as a result of the expansion of our commercial organization in preparation of the launch of full-thickness skin defects that occurred last quarter. Additionally, we incurred an increase of $0.6 million in R&D costs and an increase of $1.1 million in G&A costs, which was primarily due to an increase in stock based compensation expense.
Net loss for the quarter was $8.7 million or a loss of $0.34 per basic and diluted share compared to a net loss of $5.6 million or a loss of $0.22 per basic and diluted share in the same period in 2022. As of September 30th, we had cash, cash equivalents and marketable securities of $60.1 million compared to $86.3 million as of December 31, 2022. As Jim mentioned, we entered into a credit agreement with OrbiMed on October 18th. The debt facility provides us access up to $90 million, of which $40 million was funded at closing. Two $25 million tranches are available at our option. The first $25 million is available on or before December 31, 2024, but only if our net revenue is $75 million or more for the last 12 months. If and only if we draw the first tranche, then the second tranche of $25 million is available again at our option on or before June 30, 2025, but only if our net revenue is $100 million or more for the trailing 12 months prior to the month of a drawdown of the second tranche.
At the current time, we do not have need for either $25 million tranche. And given our revenue growth and expectations of reaching cash flow breakeven, we do not foresee a need to take down either of the $25 million tranches before they expire. With our current cash balance and the $40 million funded at closing, we are confident that we have sufficient cash reserves to achieve our goals and reach profitability in 2025. Turning now to our 2023 guidance. For the fourth quarter of 2023, we expect commercial revenues to be between $15.3 million and $16.3 million. At the boundaries, this reflects a growth rate between 64% and 73% over the prior year fourth quarter. Lastly, we are maintaining our 2023 annual revenue guidance of $51 million to $53 million provided last quarter, which within these boundaries would reflect growth between 50% and 56% over 2022.
With that, we thank you for joining us. And now, I will turn the call back to the operator for your questions. Operator?
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