AVITA Medical Inc (RCEL) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the AVITA Medical, Inc. First Quarter 2022 Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Caroline Corner, Managing Director, Investor Relations. Please go ahead.

Thank you, operator. Welcome to AVITA Medical's first quarter 2022 earnings call. Joining me on today's call are Dr. Mike Perry, Chief Executive Officer; and Michael Holder, Chief Financial Officer.

This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding the markets in which AVITA Medical operates, trends, demand and expectations for its products and technology, its expected financial performance, expenses and position in the market and the impact of COVID-19 on its operations and its customers' operations. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from any results, performance, or achievements expressed or implied by the forward-looking statements.

Please review AVITA Medical's most recent filings with the SEC, particularly the risk factors described in AVITA Medical's S-3 and 10-K filings, and in AVITA Medical's quarterly report on Form 10-Q for the first quarter ended March 31, 2022, for additional information. Any forward-looking statements provided during this call, including projections for future performance are based on management's expectations as of today. AVITA Medical undertake no obligation to update these statements except those required by applicable law.

AVITA Medical's press release with the first quarter of 2022 results is available on its website, www.avitamedical.com under the Investors section and includes additional details about its financial results. AVITA Medical's website also has the latest SEC filings, which you are encouraged to review. A recording of today's call will be available on AVITA Medical's website by 5:00 PM Pacific Time today.

Now, I would like to turn the call over to Mike for his comments on first quarter 2022 business highlights.

Thank you, Caroline, and thank you, everyone, for joining us today. We saw good growth in our top line revenue this quarter, and we are pleased to report record RECELL commercial revenues of $7.5 million and over 60% growth compared to $4.6 million in the same quarter 1 year ago. During the quarter, multiple factors drove this performance. As COVID further abated, there was an uptick in burn incidents, and we achieved greater penetration in a larger base of accounts, leading to an increase in overall burn cases treated with RECELL. Improvement in the access to burn centers and more in-person meetings as well as the return of live attendance at conferences allowed us to further educate and train physicians and perhaps more importantly, this change in dynamics permitted burn surgeons and staff to share successful RECELL case experiences.

We had strong participation at several in-person burn events this past quarter, including the Boswick Burn and Wound Symposium and the American Burn Association or ABA Annual Meeting. At the ABA Conference, there were 15 podium presentations featuring RECELL in addition to presentations referencing RECELL, underscoring burn community adoption of the RECELL system. We also hosted an event at ABA that was attended by 140 customers and successfully previewed our recently FDA-approved ease-of-use device. We plan to begin selling the ease-of-use device approved in February '22 to our larger accounts this quarter.

Although we are focused on broadening penetration into our existing accounts, we are also continuing to add new accounts. Our current commercial footprint of more than 110 certified hospitals and 270 trained surgeons positions us well for further penetration and growth in our burns business.

Turning now to the outpatient market. We initiated our limited launch in March. We are driving adoption and leveraging our transitional pass-through payment or TPT code, which became effective on March 1 of this year. Additionally, based upon initial experience and field research conducted to date, we are confident our ease-of-use device will enable us to better address the outpatient market. To address hospital staffing challenges, our field force continues to provide a high level of support in the hospital, including in the operating rooms or operating theaters as well as in postoperative support.

In this environment, we continue to prioritize training and education efforts with advanced practice providers who have a tremendous influence on the use of RECELL. In this last quarter, we held over 600 hands-on trainings in the field, and we also hosted regional and national training events. We plan to continue trainings for the rest of this year. For the many centers experiencing staffing shortages, our ease-of-use device should be especially helpful and well received.

You may have heard some recent media reports regarding the use of RECELL for the treatment of burns. One recent story highlighted a patient of Dr. Theresa Chin's. Dr. Chin treated the patient, a carpenter who was injured at a work site when a propane tank explosion resulted in severe burns to the skin on his arms, hands and legs, ultimately leaving him in a coma for 2 months. During his course of care, he underwent 7 surgical procedures and he experienced multi-organ failure. The patient who is expected to make a full recovery stated that the "most amazing technology" that the hospital used in his treatment was RECELL.

There is one last item that I would like to touch on in our burns business. Cosmotec, our partner in Japan, secured Japanese regulatory approval of RECELL for the treatment of burns, and we will meet with the Japanese Ministry of Health, Labor and Welfare for reimbursement review, which they now anticipate will occur in the fourth quarter. The delay from Q2 to Q4 is due to a COVID-related backlog of reimbursement applications, Cosmotec will launch in burns once reimbursement is established. When we have vitiligo and soft tissue data from our U.S. FDA pivotal trials, Cosmotec will pursue these indications as well.

Our commercial performance was strong in the quarter, and we also continued to make solid progress in our registration trials that are ongoing in soft tissue reconstruction and in stable vitiligo. In January, we completed enrollment in our pivotal trial evaluating the RECELL system in soft tissue reconstruction. We are on track for top line data and PMA submission of our soft tissue reconstruction trial during the second half of 2022 with FDA approval anticipated in the second half of 2023. As I've mentioned previously, once approved, we expect to immediately leverage our installed base of burn centers to treat traumatic wounds. Initially, we also plan to leverage our existing infrastructure to launch the RECELL system into approximately 350 Level 1 and Level 2 trauma centers, of which 220 centers will be new trauma center call points. Notably, centers will be able to use the reimbursement codes already in place for the burns setting.

We are enthusiastic about the opportunity in soft tissue, and we plan to thoughtfully invest in growing this business to ensure commercial success. Again, our improved ease-of-use device will enable us to better address soft tissue reconstruction and adoption will further be facilitated by our existing indication-agnostic TPT code. In recent compelling market research, 94% of healthcare practitioners indicated that our new ease-of-use device will reduce their workload, enabling staff to attend to other duties and allowing for faster penetration of spray on skin cells. This represents another meaningful step forward on our pathway to becoming the standard of care in acute wounds and it also provides further opportunities for us to expand our intellectual property estate.

Turning now to vitiligo. And as I've stated in previous calls, this is a skin disorder characterized by depigmented areas of skin that appear as white spots or patches and which are primarily attributed to an underlying autoimmune disorder in the patient. There are an estimated 100 million sufferers of vitiligo worldwide, including up to 6.5 million Americans. As we mentioned previously, our RECELL product involves manual and somewhat time-consuming preparation of cell suspension in the range of 25 to 30 minutes. To make the best use of physician and advanced practice personnel's time in the dermatologist office to support our vitiligo opportunity, we are developing a fully automated RECELL device. We expect top line data from our vitiligo trial followed by PMA submission during the second half of 2022 with FDA premarket approval and commercial introduction anticipated prior to the end of 2023. Today, we estimate approximately 1.3 million people in the United States have stable vitiligo, meaning that their underlying autoimmune disease is being well managed and that their disease is not continuing to progress.

Of note, there are several pharmaceutical companies developing JAK inhibitor products and aiming for an indication in the treatment of nonstable vitiligo. As we are pursuing an indication for RECELL to treat stable vitiligo lesions, these JAK inhibitor products would be complementary to RECELL. JAK inhibitors modulate the underlying autoimmune disease that causes the white patches, but the white patches once formed, often remain even after disease stabilization. We are seeing promising JAK inhibitor product candidates from the likes of Pfizer, AbbVie and Incyte. If approved, use of these products, which appear to have potential for stabilizing vitiligo would likely increase the number of candidates for whom RECELL treatment is indicated. As JAK inhibitors come to market with a vitiligo indication, we anticipate an increase in awareness and interest in vitiligo treatments, including RECELL.

We have been working diligently on our vitiligo pre-commercialization activities. We have participated in 6 vitiligo conferences since January of this year, including Maui Derm, the Global Vitiligo Foundation or GBF Annual Scientific Symposium, the Skin of Color Society meeting, the American Academy of Dermatology or AAD, the San Diego Dermatological Society and the Symposium for Cosmetic Advances and Laser Education or SCALE. Dr. Katie Bush, our Senior VP of Scientific and Medical Affairs, presented our vitiligo clinical trial protocol on podium in Boston at the GBF Annual Scientific Symposium. At the conferences, AVITA has had numerous meetings with and gathered valuable feedback from dermatology KOLs who have expressed strong interest in RECELL. Of note, at these conferences, 19 sessions featured vitiligo, a marked increase year-over-year as JAK inhibitors and our RECELL device have stimulated interest in vitiligo treatments.

Importantly, RECELL received numerous mentions in these sessions. In addition to completing enrollment in our pivotal soft tissue and vitiligo trials, we recently established proofs-of-concept for novel treatments in skin rejuvenation and in epidermolysis bullosa. Work continues on both programs as we aim to refine and optimize these potential therapeutics with an aim to meet with FDA in the second half of 2022 to discuss readiness for first-in-human clinical trials. Importantly, we plan to pursue strategic partnerships that would provide necessary funding for these programs to minimize our cash outlays as these programs proceed into the clinical phases of their development.

With that, I'd now like to remind you of our growth drivers. Our first growth driver relates to pipeline indications for both soft tissue reconstruction and vitiligo clinical trials, we anticipate top line data during the second half of 2022 with expected submission of PMA supplements by the end of 2022. We anticipate entering the market in the second half of 2023 in both indications. Second, with our C code in place, we have commenced our pilot launch into the outpatient setting, and we are gearing up for a broader nationwide launch targeting all existing users in the middle of this year. Third, we are keenly focused on driving healthcare provider engagement through education, maintaining our recent momentum.

In summary, despite past pressures from the pandemic on burn procedures as well as continued market turbulence in our investment sector, we have continued to execute on our business objectives, and we have successfully completed several key milestones. I'm encouraged by our commercial team's performance, driving advanced practice training and keeping RECELL front and center in the minds of burn care practitioners. I look forward to updating you later this year on our continued progress in our exciting pipeline indications.

With that, I'll now turn the call over to Michael for details on our financial performance in the quarter. Michael?

Thank you, Mike. Our commercial revenue, which excludes BARDA revenue was $7.4 million in the current year, an increase of $2.8 million or 61% compared to $4.6 million in the corresponding period in the prior year. Total revenue including BARDA revenue was $7.5 million compared with $8.8 million in the corresponding period in the prior year, which included $4.1 million in BARDA-related revenue that resulted from our delivery of units to manage inventory for BARDA for emergency response preparedness. The increase in commercial revenue was largely driven by broader utilization among our customer base as well as deeper penetration within individual customer accounts.

Gross profit margin was 76% and is flat compared to the corresponding period in the prior year. We expect gross profit margins to return to historical levels of low 80% in the next quarter and going forward for the balance of the year. While our supply chain has experienced some challenges due to COVID and other global issues, neither our gross margin nor our ability to deliver RECELL product to customers have been materially impacted.

Total operating expenses increased by 21% to $16 million compared to $13.2 million in the corresponding period in the prior year. The increase in operating expenses is primarily attributable to higher share-based compensation, salary and benefits. Higher share-based compensation expenses are associated with acceleration of expense for certain performance milestones being met in the current quarter. Higher salary and benefits are driven by the expansion of our workforce to support overall operations, an increase in field resources to expand our market coverage and hiring of an executive at the end of March 2021.

Net loss increased by 58% or $3.5 million to $9.5 million or $0.38 per share compared to a net loss of $6 million or $0.26 per share in the corresponding period of the prior year. Non-GAAP adjusted EBITDA loss increased by 42% or $1.9 million to $6.4 million over the $4.5 million recognized in the corresponding period in the prior year. A table reconciling non-GAAP measures is included in our press release for reference.

Moving on to guidance. We expect to project total commercial revenues of approximately $30 million, excluding BARDA revenues of approximately $300,000. And with that, we thank you for your attention. And now I will turn the call back over to the operator for your questions.

(Operator Instructions) Our first question comes from the line of Josh Jennings from Cowen.

Congratulations on a strong start to 2022. I was hoping to just start off with the new RECELL system. Sorry if I missed if you gave this down already and I missed it, but just thinking about the approval utilization potentially in any setting, including off-label and soft tissue and just any feedback you've been getting, including an ABA would be helpful in just in how you're seeing the efficiencies of this next-gen system taking hold?

Sure. Thanks for the question. We are really seeing a very nice reception to our ease-of-use device. We had an introductory session at the ABA, where we had a very good attendance and a high level of enthusiasm from burn surgeons and other ancillary practice advisers. We haven't launched yet. That's going to be really midyear when we're going to be launching, the actually limited launch is going to be later this quarter.

And what does the ease-of-use device do? It actually reduces the number of steps required to prepare RECELL suspension by 30%. And it also requires less pair of hands in the sterile field. Only one pair of hands is required, whereas previously you needed another pair of hands outside of the sterile field to open the various packages for syringes, scalpels et cetera.

And this is going to play very well with our newly issued TPT code, which covers the outpatient setting, and will cover the device and also 94% of providers have said that they believe that the new ease-of-use device will specifically reduce their workload and allow them and their staff additional time for other duties and will make the process just a lot smoother. I hope that answered your question, Josh.

Absolutely. I was jumping the gun on the launch there. I apologize. But maybe just to focus on the outpatient opportunity, soft tissue trauma and just thinking about the broad kind of TPT and solid reimbursement is in play. You have physicians that are already trained as we think about forecasting out that launch and building it into our models, maybe just remind us of just the pricing strategy for the RECELL kit as you're moving into outpatient burns with this new system and in the soft tissue eventually.

Sure. And so far as the pricing, it's going to be the same for soft tissue as it is for burns. We've got, if you recall, about a 50% overlap of our burn centers with Level 1 and Level 2 trauma centers. And then we're going to be adding to that an additional 230, 240 high-capacity trauma centers. we're going to be discontinuing the existing 1920 device. It's called the 1920 because it covers 10% total body surface area, which is 1,920 square centimeters in adults. But we're very excited about soft tissue, and we're getting a groundswell of support even now, while we've just completed enrollment of the clinical trial. And we have endpoints coming up for both soft issue and vitiligo. The top line data will be presented in the second half of 2022 of this year. and then we'll submit the PMA for both indications by the end of this calendar year, and we're anticipating approval and commercial launch in the second half of next year.

Our next question comes from the line of Matthew O'Brien from Piper Sandler.

I guess for starters on the guide for the year of the top line, I know you were tending for some Japanese revenue this year, we're not going to get until next year, which is really not that big a deal in my mind. But you just did about $7.5 million on the core side of things, basically annualizing that gives you the $30 million you're guiding to. So no growth, even though it seems like you took some share this quarter among just the traditional approaches to treating burns. So why not be a little bit more aggressive on the guide for the full year, given what we just saw in Q1?

Thanks, Matt, for your question. When we model it, we've got the seasonality in burns, which I'm sure you've been familiar with, that's not a steady curve. And we have some uncertainty relative to COVID in the second half of the year. So for now, we're maintaining guidance for the annual year.

Okay. Makes sense. And then, Mike, what are you seeing -- I know last quarter, you mentioned this labor headwind, which makes sense again. Is that starting to ease at all? And if not, any sense for when that could be a little less of a headwind. And then what -- I don't know if you said it, but just the top 20 account growth, what did you see in the quarter?

Yes. I'll take your first question first and then deal with the top 20 account growth. relative to the staff shortages, primarily nurses that we've seen in the medium-sized and smaller burn units. The way that we've responded to that is in training. And as I mentioned in my formal remarks, we did over 600 trainings in the quarter. We don't anticipate that, that will reduce in the near term, but that is allowing us to continue to treat new as well as -- to treat patients and for surgeons to continue to learn and for staff to not be limited because we are sending in our staff who are -- many are former burn nurses and our experts at utilizing RECELL, of course. And they know the physicians, the burn surgeons and we're able to get in there and mitigate that headwind. That said, it will continue, but we do have the capacity now given that we've got free access into the hospitals. The restrictions are really not there anymore. That has abated, and we're able to get into the cases where we need to and where we have physicians trained and utilizing the RECELL system.

Our top 20 continue to drive a majority of our RECELL system. But that said, that number is reducing, and we're happy to see that it's actually pretty flat. But what we are seeing that is sort of a lead indicator is that the top 20 potential grew at about 14%. And then we're seeing a lot more of the lower TBSA wounds, which means that our adoption curve is going in the right direction.

Our next question comes from the line of Ryan Zimmerman from BTIG.

All right. I want to start off a couple for me, Mike. On the new system, I know Josh asked about pricing, is there any gross margin benefit that we should consider as a result of the launch of the new system, just maybe from lower raw material costs or less parts because it is more efficient.

Actually, Ryan, it's going to be the same margin, the same price, it's really an efficiency of repackaging and resterilizing the unit so that you don't need that extra pair of hands, you don't need extra boxes to open and the coordination of the burn surgeon and the advanced management practice practitioners that are with the surgeon that just that flow goes so much easier, but it's really the same materials rearranged in an order that facilitates usage of the RECELL system.

Okay. Got it. Crystal clear on that. And then for the automated system, very exciting to hear about that. I think we'll obviously be watching that closely. How do you think about the regulatory pathway for that? I mean I don't want to put the cart before the horse, but you're getting vitiligo on, I believe, the PMA supplement, do you think you'd need a separate trial with the agency for an automated system? Or do you think you could maybe get that under a PMA supplement under your existing PMA?

So it would definitely go through as a PMA supplement. The question is, is it a 90-day or 180-day supplement, my guess, given my own background in regulatory is that this is going to be a 180-day supplement, given that it's going to be fully automated and the agency is going to want to see viability and functionality. And there's also the possibility of a small bridging study being required. But really, what we're looking at is comparability of the manual production of cell suspension to the automated production of suspension and that will be the major FDA and likely be biologics because we're looking at cellular suspension, cellular viability and cellular functionality. But as I said, likely to be 180-day PMA supplement.

Okay. All right. Well, we'll be watching that could be pretty excited. And the last one from me and I'll hop back in the queue. Just around operating expenses, Michael, just because they came in a couple of different lines, different than we expected. I just would love to get your sense about how to think about OpEx cadence through the rest of the year.

Yes, you bet. Thanks for the question. So on our last earnings call, we spoke about a 20% increase in operating expenses year-over-year. And that is roughly how we came in the first quarter. However, as you dig a little deeper in our G&A, you'll see that there was a stock comp expense that was higher than was anticipated because as mentioned earlier, there was a performance milestone that was hit, that was pretty material. So we had $2.3 million of stock comp, which flowed through G&A, whereas normally that might be about $1.3 million. So in terms of the cadence through the rest of the year, we would actually expect our operating expenses by our 3 main line items to stay relatively constant, except that G&A will come back down to a normalized basis. So we expect total expenses to remain about the same, but perhaps come down a little bit in each of the quarters for the balance of the year.

(Operator Instructions) Our next question comes from the line of Lyanne Harrison from Bank of America.

Can you talk about -- obviously, you answered that question on guidance. Can you give us a little bit of color in terms of what you're experiencing in incidences and procedure volumes for April and for May thus far?

Sure. We're not specifically reporting on procedure volumes. That said, though, as the year is progressing, April is generally a slow month for us and for incidence of burns. However, we're seeing a nice recovery as we normally do. And I think we're seeing a relatively strong second quarter.

Okay. Great. And then on gross profit margins, you mentioned that you might see that increased the low 80% into the next quarter. Can you talk a little bit about what's going to drive that?

Michael, could you take that one?

I would be glad to. So in this past quarter, the production level was relatively low given that, as Mike mentioned earlier, with our existing units, which we call the 1920s, we're looking to run those inventory levels down over time as we discontinue that line. So as production levels came down, some of the various costs, which you average out over your units went up such that our gross profit margin came down temporarily now that our production levels are back up to a more normalized level, we expect again our gross profits to get back in the low 80% range for the balance of the year.

Okay. And perhaps one more question for you, Michael, is on operating cash outflow. So in terms of the remainder of this calendar year, would we expect cash outflow to be similar per quarter as to what we saw in the first quarter?

Yes. Thank you. That's a good question. Actually, we would expect cash outflow or cash flow from operations to be reduced somewhat. This past quarter, it was $9.4 million. However, the first quarter is usually a higher cash usage quarter for us because it's that time of the year that we pay out bonuses. Additionally, in this past quarter, we had an increase in various working capital accounts, including receivables, both trade and BARDA in the amount of about $600,000 or $700,000 as well as in accounts payable by about $0.3 million or $300,000. So there were a number of things that we wouldn't necessarily expect to continue. But the way that nets out, whereas net cash used in operations was $9.4 million this quarter. We would expect that to probably be in the $7.5 million or $8 million range on average for the remaining 3 quarters of the year.

Our next question comes from the line of John Hester from Bell Potter.

I just wanted to have, again, follow on that question from cash -- I believe your closing cash position was about $83 million based on the balance sheet there, Michael. I think there's maybe a slight discrepancy from the number. It's in the final bullet point of the front page there of your note. But just wanted to ask now based on that cash burn and your remaining reserves, and obviously, you don't want to be raising cash at anywhere near current stock price levels. What's the plan for development of these longer-dated indications including [equity] and also (inaudible) program. Are you continuing to develop those at speed? Or is it really just a case that you're going to consolidate the existing products that you've got?

Let me start off, John, it's Mike Perry. Thanks for the question. Really, what we're going to be doing is focusing very much on soft tissue, the approval, the wording and the commercial launch for both soft tissue and vitiligo. The amount of spend going into the biologics, epidermolysis bullosa and our rejuvenation program is going to be really minimal this year, and our intention going forward is likely to partner for those indications. Michael, is there anything you might want to add from a numerical perspective on cash for John?

Yes, I would. So John, actually, our cash, cash equivalents and marketable securities are in fact $95 million. What you perhaps might be missing is the line item on the balance sheet, which is marketable securities long term, which is $11 million, and that actually is almost entirely U.S. treasuries that have a maturity of greater than 1 year. So I would just say that we're -- Mike, we're quite fortunate to be in the position we are with $95 million.

That takes us through commercialization of both indications.

Yes. And relative to EV, just to expound a little bit and cell and gene therapy. The cash outlay is very modest, the $95 million is earmarked for burns, vitiligo and soft tissue. And so as Mike mentioned, if and as we go into any sort of clinical pathway, then we would be looking to partner. But I would also add that from a BD standpoint, we have also become much more circumspect with how we're looking at deals. In today's environment, with our share price at levels that we find to be undervalued and given that our cash is earmarked for the indications that I mentioned, then we are looking for deals that add revenue very quickly, if not immediately, and/or are accretive to earnings very quickly. And again, are looking at those in a very disciplined way so that we preserve our $95 million in cash.

So it would be fair to say based on those comments that you sort of with always depressed pricing on at the moment that you're more active and less active in the M&A market.

No, I'd say we are equally active. However, again, we're being very disciplined about what we pursue because in order to pay for any sort of BD transaction, we need to use cash or equity or debt. And we have no debt currently, and we don't have any desire to take any on at the moment. And we're not interested in issuing shares at the current share price. And again, we're preserving our cash. So it's just as active, but we're just much more disciplined.

Okay. And just finally, if I could just follow up on the gross profit margin question. You talked about the margin in the first quarter. Should we expect that to bounce back to better than [80%] going forward?

Yes.

Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.