Good day, and thank you for standing by. Welcome to the AVITA Medical, Inc. Q1 2022 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. 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 Q1 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 Q1 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 undertakes no obligation to update these statements except as required by applicable law. AVITA Medical's press release for Q1 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're encouraged to review. A recording of today's call will be available on AVITA Medical's website by 5:00 P.M. Pacific Time today.
Now I'd like to turn the call over to Mike for his comments on Q1 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 one 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 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 2022 to our larger accounts this quarter. Although we are focused on broadening penetration into our existing accounts, we're 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 1st 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 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. Teresa 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 two months. During his course of care, he underwent seven surgical procedures, and he experienced multi-organ failure.
The patient, who is expected to make a full recovery, stated that the most amazing technology, quote-unquote, "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 Q4 . The delay from Q2 - 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 US 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 One and Level Two 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 burn 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, 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 25-30 minutes. To make the best use of physician and advanced practice personnel's time in the dermatologist's 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 pre-market 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 non-stable 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 six vitiligo conferences since January of this year, including Maui Derm, the Global Vitiligo Foundation or GVF 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 GVF 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 1st 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. 2nd, 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. 3rd, 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- $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- $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. With that, we thank you for your attention. Now I will turn the call back over to the operator for your questions.
Our first question comes from the line of Josh Jennings from Cowen. Your line is now open.
Hi, good afternoon. Appreciate you taking the questions, and congratulations on strong start to 2022. I was hoping to just start off with an-
Absolutely.
Wanted to start off with a new RECELL system. Sorry if I missed if you gave this demo already, and I missed it. Just thinking about the overall utilization potentially in any setting, including off-label and soft tissue and just any feedback you've been getting, including at ABA, would be helpful in just 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 advisors. You know, we haven't launched yet. That's gonna be really midyear when we're going to be launching. The actual limited launch is gonna be later this quarter. What does the ease-of-use device do? It actually reduces the number of steps required to prepare RECELL suspension by 30%. It also requires fewer pairs 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. This is going to play very well with our newly issued TPT code, which covers the outpatient setting and will cover the device. 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. As I was jumping the gun on the launch there, I apologize. Maybe just to focus on the outpatient opportunity in soft tissue trauma, and just thinking about the broad kinda TPT and solid reimbursements in play, you have physicians that are already trained. As we think about forecasting out that launch, and building it into our models, can you just remind us of just the pricing strategy as for the RECELL kit as you're moving into outpatient burns with this new system and in the soft tissue eventually? Thanks for taking the questions.
Sure. Insofar 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 one and level two 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 RECELL 1920 device. It's called the RECELL 1920 because it covers 10% total body surface area, which is 1,920 square centimeters in an adult. 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.
you know, we have endpoints coming up for both soft tissue and vitiligo. The top-line data will be presented in the second half of 2022 of this year. 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.
Thanks so much. Appreciate it, Mike.
Of course, Josh.
Thank you. Our next question comes from the line of Matthew O'Brien from Piper Sandler. Your line is now open.
Great. Thanks for taking the question. I guess, you know, for starters, on the guide for the year on the top line, you know, I know you were kind of hoping for some Japanese revenue this year, and you're not gonna get it till next year, which is really not that big a deal in my mind. But, you know, you just did about $7.5 million on the core side of things, you know, 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, you know, 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. You know, when we model it, we've got the seasonality in burns, which I'm sure you've been familiar with. It's not a steady curve. We have some uncertainty relative to COVID in the second half of the year. For now, we're maintaining guidance for the annual year.
Okay. Makes sense. Mike, what are you seeing? I know last quarter you mentioned, you know, this labor headwind, which makes sense again. Is that starting to ease at all? You know, and if not, any sense for when that could be a little less of a headwind? I don't know if you said it, but just the top 20 account growth, what did you see in the quarter? Thanks.
Yes. Take your 1st 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 trainings. 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, you know, to re-treat, 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 are 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, you know, it'll continue. We do have the capacity now, given that we've got free access into the hospitals. The restrictions are really, you know, not there anymore. That has abated, and we're able to get into the cases where we need to and where we have, you know, physicians trained and utilizing the RECELL system. You know, 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, you know, 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.
Great. Thank you.
You're welcome, Matt. Thanks for the question.
Thank you. Our next question comes from the line of Ryan Zimmerman from BTIG. Your line is now open.
All right. Good afternoon. Thanks for taking the questions. Wanna start off a couple from 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, you know, 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 re-sterilizing the unit so that you don't need that extra pair of hands.
Yeah
Extra boxes to open. The coordination of you know the burn surgeon and the advanced practice practitioners that are with the surgeon, that the 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. For the automated system, you know, very exciting to hear about that. I think we'll obviously be watching that closely. How are you thinking about the regulatory pathway for that? I mean, I don't wanna put the cart before the horse, but, you know, 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, you know, maybe get that under a PMA supplement under your existing PMA?
It would definitely go through as a PMA supplement. The question is it a 90-day or a 180-day supplement? My guess, given my own background in regulatory, is that this is going to be a 180-day supplement, given, you know, that it's going to be fully automated, and then the agency is going to wanna see, you know, viability, and functionality. You know, there's also the possibility of a small bridging study being required. Really what we're looking at is comparability of the manual production of cell suspension to the automated production of suspension. That will be the major, you know, FDA and likely be biologics because we're looking at cellular suspension, cellular viability, and cellular functionality.
As I said, likely to be a 180-day PMA supplement.
Okay. All right. Well, we'll be watching that. Could be pretty exciting.
Yeah.
The last one for me, and I'll hop back in the queue. Just around operating expenses, Michael. Just 'cause, you know, they came in a couple different lines, you know, different than we expected. I just, you know, would love to get your sense about, you know, how to think about OpEx cadence through the rest of the year.
Yeah, you bet. Thanks for the question. 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 Q1 . 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. We had $2.3 million of stock comp, which flowed through G&A, whereas normally that might be about $1.3 million.
In terms of the cadence through the rest of the year, we would actually expect our operating expenses by our three main line items to stay relatively constant, except that G&A will come back down to a normalized basis. 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.
Thank you very much. Appreciate it. Great start to the year.
Thanks, Ryan.
Thank you. Our next question comes through the line of Lyanne Harrison from Bank of America. Your line is now open.
Morning, Mike. Morning, Michael. Obviously, you answered Matt's 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, you know, April is generally a slow month for us, and for incidents of burns. However, we're seeing a nice recovery as we normally do, and I think we're seeing a relatively strong Q2 .
Mm-hmm. Okay. Great. Thank you. Then on gross profit margins, you mentioned that you might see that increase to the low 80% into the next quarter. Can you talk a little bit about, you know, what's gonna drive that?
Michael, could you take that one?
I would be glad to. In this past quarter, the production level was relatively low, given that, as Mike mentioned earlier, with our existing units, which we call the nineteen twenties, we're looking to run those inventory levels down over time as we discontinue that line. As production levels came down, some of the various costs which you average out over your units, you know, 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.
Mm-hmm. Okay. Thank you. 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 what we saw in Q1 ?
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.
Mm-hmm.
It was $9.4 million. However, the Q1 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-$700,000, as well as in accounts payable by about $0.3 million or $300,000. 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-$8 million range on average for the remaining Q3 of the year.
Great. Thank you very much.
You're welcome.
Thank you. Our next question comes from the line of John Hester from Bell Potter. Your line is now open.
Hi. Good afternoon, Michael and Mike. Thanks for your time. I just wanted to have it 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 that'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, you know, what's the plan for development of these longer data indications, including EB and also RECELL and broader cell and gene 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?
Well, 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. Our intention going forward is likely to partner for those indications. Michael, is there anything you might wanna add from a numerical perspective on cash for John?
Yes, I would. John, actually, our 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. That actually is almost.
Yeah, I see that. Yeah. Yeah.
Entirely U.S. Treasuries that have a maturity of greater than one year. I would just say that we're, Mike, quite fortunate to be in the position we are with $95 million, and-
That takes us through commercialization of both indications.
Yes. Relative to EB, just to expound a little bit in cell and gene therapy, the cash outlay is very modest. The $95 million is earmarked for burns, vitiligo, and soft tissue. As Mike mentioned, if and as we go into any sort of clinical pathway, then we would be looking to partner. I would also add that from a BD standpoint, we've 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, we're looking for deals that add revenue very quickly, if not immediately, and/or are accretive to earnings very quickly.
Again, we are looking at those in a very disciplined way so that we preserve our $95 million in cash.
It would be fair to say, based on those comments, that you're sort of with all this depressed pricing that's around at the moment, that you're, you know, more active than less active in the M&A market?
No, I would say we're equally active. However,
Mm-hmm.
Again, we're being very disciplined about what we pursue because, you know, in order to pay for any sort of BD transaction, we need to use cash or equity or debt. We have no debt currently, and we don't have any desire to take any on at the moment. We're not interested in issuing shares at the current share price. Again, we're preserving our cash. It's just as active, but we're just much more disciplined.
Okay. Just finally, Michael, just to follow up on the gross profit margin question. You talked about the margin in the Q1 . Should we expect that to bounce back to better than 80% going forward?
Yes.
Okay. Good. Thank you very much.
Thank you, John. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.