AVITA Medical, Inc. (NASDAQ:RCEL) Q1 2023 Earnings Call Transcript May 11, 2023

AVITA Medical, Inc. misses on earnings expectations. Reported EPS is $-0.37 EPS, expectations were $-0.25.

Operator: Good day and thank you for standing by. Welcome to the AVITA Medical Inc. First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would not like to turn the call over to Jessica Ekeberg, Investor Relations. Please go ahead.

Jessica Ekeberg: Thank you, operator. Welcome to AVITA Medical’s first 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 statement. Please review AVITA Medical’s most recent filings with the SEC, specifically the risk factors described within Form 10-Q for the year ended March 31, 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 first quarter 2023 results is available on its website, www.avitamedical.com under the Investors section. A recording of today’s call will be available on website by 5:00 PM Pacific Time today. Joining me on today’s call are Jim Corbett, Chief Executive Officer; and Sean Ekins, Acting Chief Financial Officer. I will now turn the call over to Jim for his comments.

James Corbett: Thank you, Jessica. Good afternoon everyone and thank you for joining us today. I will begin today’s call by discussing highlights of the first quarter, followed by an update on 2023 priorities. Sean will then provide more detailed commentary on our financial performance before opening the call to Q&A. We started the year with a solid first quarter with commercial revenue of 10.5 million, which is a 40% increase over the same period in 2022. More importantly, we hit the midpoint of our first quarter guidance, which was expected to be between $10 million and $11 million. This keeps us on track to deliver our year of significant revenue growth, which I will discuss later in the call. As a reminder, commercial revenue includes all global revenue and excludes the $100,000 of BARDA revenue recognized in the quarter.

Our commercial revenue is comprised of two components, U.S. revenue and foreign revenue. As mentioned on prior calls, Japan revenue represents majority of the foreign revenue line item. Sean will detail the drivers of revenue later in this call. We continue to expand RECELL utilization and to develop scientific data to position RECELL as the standard-of-care. This is evidenced by our significant presence at the upcoming American Burn Association Annual Meeting next week. This forum mobilizes more than 2,000 burn care professionals and providers of burn products, care and related services to share, discover, and advance the field. We are pleased to have five podium presentations and three unique poster presentations this year at the meeting, and hope to see some of you there.

Additionally, I’m thrilled to announce the appointments of Terry Bromley as Senior Vice President of Global Sales; and Debbie Gardner as Senior Vice President of Global Marketing and Strategy. Terry and Debbie are veterans of Avita Medical having led our U.S. commercial efforts the last five-years. Both Terry and Debbie will directly report to me. As you may have read in today’s earnings release, Erin Liberto has accepted a role with a privately held company. We appreciate her contributions to our business, specifically her efforts to build an experienced and best-in-class commercial team. On behalf of Avita Medical, I would like to thank Erin for her work and dedication to our organization. Moving on to 2023 priorities, which we believe will transform our business and expand our growth trajectory.

With respect to our two pending applications with the FDA, our PMA supplement for soft tissue repair and our PMA application for Vitiligo, we remain on track and affirm our expectations of June approvals. With the pending PMA supplement for soft tissue repair, we will leverage our existing infrastructure and meaningfully broaden our acute wounds business. As a reminder, the soft tissue indication uses the same reimbursement codes as burns. Thus, will have access to both in-hospital reimbursement through ADRG and outpatient reimbursement through a transitional pass-through code immediately upon FDA approval for soft tissue indications. Additionally, of our nearly 150 U.S. Burn Center partners, approximately half are either level 1 or level 2 trauma centers, which treat 110,000 or more soft tissue injuries.

Since we are already VAC approved in those centers, these facilities will have immediate access to the expanded label upon FDA approval of soft tissue repair. To maximize the soft tissue opportunity. Last quarter, we announced the expansion of our U.S. field sales organization. In the first quarter, we initiated our expansion plan and became the recruiting and hiring process. We are extremely pleased with our recruitment efforts. As of today, we are ahead of schedule and only have three positions left to fill of the over 40 that we were seeking to add. Additionally, we are underway with the onboarding and training process. Further, we reorganized our sales regions, which expanded the regions from two to eight. This has been done in front of the expected June PMA supplement for soft tissue repair so that the team is in place and trained at launch.

As noted last quarter, this will result in a peak operating expense as a percent of revenue in Q3 2023.However, I emphasize that our contribution margin on a new field sales professional is breakeven with approximately five resale kits sold per month per individual. Currently, the average productivity of a direct sales rep exceeds 20 kits per month. This is what I call weaponizing our gross profit to enhance market adoption and penetration for the salesforce pays for itself quickly. Given this update, we maintain our expectation of a full commercial launch of soft tissue on July 1st, 2023, assuming June approval. For the Vitiligo indication, we are in the process of pursuing reimbursement to allow for in-office use of RECELL. As mentioned on our last call, it is our goal to secure reimbursement by 2025.

During the interim period, we will be implementing cash pay for Vitiligo patients and physician sponsored studies to build our podium presence. Now an update on our automation device. Last month, we confirmed that this device now branded as RECELL GO. Maintains the FDA breakthrough device designation for the treatment of acute wounds. RECELL GO represents an evolution of the existing RECELL technology and is designed to automate the process of cell disaggregation. Automating the cell disaggregation process will substantially reduced training requirements, allowing us to leverage selling time more effectively. Additionally, it will ease the burden of additional training required by physicians and operating room staff to manually perform disaggregation, leading to increased adoption.

RECELL GO is a critical component of our platform and we believe it will greatly accelerate our growth. We plan to submit our PMA supplement application to the FDA by June 30 of this year. Under the breakthrough device program, the submission will receive prioritized interactive review with an expected January 2024 approval. Our dedication to RECELL GO further reflects our continued commitment to innovation in patient care. With respect to 2023 guidance, for the second quarter of 2023, we expect commercial revenues to be between $10.7 million and $11.7 million. At midpoint of this guidance, we would be up over 40% over the prior year. We maintain our 2023 annual revenue guidance of $49 million to $51 million, which would be at midpoint of guidance, 47% growth over 2022.In closing, we continue to execute on our 2023 priorities and remain committed to delivering strong results.

With that, I would like to turn the call over to Sean Ekins, Acting Chief Financial Officer.

Sean Ekins: Thank you, Jim. In a three-months ended March 31, 2023, our commercial revenues which excludes BARDA revenue increased by 40% to 10.5 million compared to 7.4 million in the same period in 2022. The increase in commercial revenue is largely driven by broader surgeon usage as well as deeper penetration, particularly within smaller burn procedures. Along with the commencement of commercial sales with our partner COSMOTEC and Japan. Total revenue which includes BARDA revenue increased by 40% to 10.6 million compared to 7.5 million in the same period 2022. BARDA income decreased as reimbursed clinical trial expenditures, decreased in the current period as soft tissue in pediatric trial participants largely completed fall visits in 2022.

Gross profit margin increased by 8% to 84%, compared to 76% compared to the same period in 2022. The increase in gross profit margin is largely driven by increased production and lower shipping costs. Total operating expenses for the quarter increased by 22% to 19.4 million compared to 16 million in the same period in 2022. Increase in operating expenses is attributable to increased research involvement, salaries and benefits, severance costs and selling expenses. Higher research and development expenses were a result of ongoing development of the RECELL GO device for the planned FDA submission in June 2023. Additionally, we had higher costs associated with the deployment of a team of medical, science liaisons in anticipation of our soft tissue launch in July 2023.

Salaries and benefits increased concurrently with our strategic plan to expand our commercial sales force ahead of the soft tissue launch. As Jim noted, the expansion of our sales force team will result in additional operating expenses that will peak as a percentage of revenue in Q3 2023. In the quarter, we incurred severance costs related to two former executive officers. Lastly, higher selling costs are attributable to commissions driven by the increase in our revenues. Net loss decreased by 3% to 9.2 million or $0.37 per share compared to a net loss of 99.5 million or $0.38 per share in the same period in 2022. Adjusted EBITDA loss stayed flat at 6.4 million. A table of reconciling non-gap measures is included in today’s press release for reference.

Lastly, I wanted to provide you with an update in regards to our former commercial bank Silicon Valley Bank. We did not encounter any loss of cash or assets as a result of the bank failure. Subsequently, we established a new commercial banking relationship with Bank of America. With that, we thank you for your time, and now I will turn the call back to the operator for your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Joshua Jennings from TD Cowen. Your line is now open.

Operator: Thank you. And our next question comes from Matthew O’Brien from Piper Sandler. Your line is now open.

Operator: Thank you. [Operator Instructions] And our next question comes from Ryan Zimmerman from BTIG. Your line is now open.

Operator: And thank you. And I’m showing no further questions. This concludes today’s conference call. Thank you for participating, and you may now disconnect.