Good afternoon to everyone in the U.S. and good morning to those joining us in Australia. I'm Rudi Michelson from Monsoon Communications. Welcome, and thank you for joining us for AVITA's Australian Investor Webinar. The AVITA CEO, Jim Corbett, is back in Australia for a Sydney, Melbourne roadshow this week, following another strong quarter financial results. Now, let me point out, you can submit questions using the Q&A function, and we'll get to them after the presentation. Presenting today is Jim Corbett, and assisted by CFO David O'Toole. I'll now hand over to Jim Corbett to begin the presentation.
Good morning, Australia. I'm really excited to be here in country again. Although we are sharing this also with our U.S. investors, this would be our fourth quarter in a row where we're doing this from Australia during my quarterly visit to meet with our ASX investors and possible investors. That's really excited to be here. I will say, it is darn cold here in Melbourne. Let me begin with talking about the results for the quarter. Let me back up for one second. For those of you who may be new, let me describe a bit about who is AVITA Medical. We are a we are a regenerative medicine company. We, we are, we are, in effect, setting the standard of care for skin restoration and healing using cellular technology platform called the RECELL System.
The RECELL System is an autologous cell harvesting device, so that means from the patient, you take the autologous sample from the patient, and we have a method of processing it and disaggregating that, those cells and putting them into a enzyme suspension, creating the a solution with, filled with cells and enzyme and other matters that basically allow the cells to survive and thrive while we put them in the spray-on applicator, and then we spray that applicator on the wound directly. The cells, when they come to the patient, are disaggregated, they, they're in, in the suspension enzyme, and they cause for faster healing. Fundamentally.
It is a consequent, we use much less skin, for example, in the, in the order of, under, under 20% of the normal amount of skin graft you would need for a comparable graft to solve that patient's need. The patient could tell the hospital sooner, which of course, means they must be healing faster. That donor sparing with less tissue from the patient is something that really is also helpful to the patient's healing. It's a really unique technology and offers incredible benefit to the patient. We've, our current U.S. indications are new this quarter. First of all, we've had what is known as a thermal burn wound indication up until June 7th of this year.
During, since I was here last time, we also received an approval, which I'll talk some more about, in full-thickness skin defects and for repigmentation of stable, depigmented vitiligo lesions. Here's a description of how it works. The healthy skin is removed from the patient, from the area, of course, that it's not been injured. It's processed and disaggregated by the physician, so it is a manual process by the physician to disaggregate the cells into the device, where it mixes with the enzyme and gets prepared for spray-on application. It is then loaded into the spray-on applicator and placed, and sprayed onto the wound. That's how it works. Let's talk about the multiple indications. This is really building a platform. We should see RECELL as a broad platform for the treatment of wounds.
Up until 2022, as you can see, we had approval from an indication point of view for burns. We also received an outpatient reimbursement code. Currently, up until that time, the RECELL procedure was reimbursed in the burn centers using a DRG code. That's a code that covers the whole procedure. In 2022, we also received and used the outpatient transitional pass-through code. We submitted a supplement from a clinical trial for full-thickness skin defects in December. We also submitted a PMA submission for pigment transplant or repigmentation for the condition known as vitiligo. This year, in June, we received approval for full-thickness on June 7th. We launched June 8th. We'll talk a little bit about that during my call here today.
We also received approval for vitiligo on June 16th, both on schedule, 180 days after submission, which is the perfect time definition for a PMA submission under the Breakthrough Device designation that both submissions operated under. Also, we've initiated in the month of July, a post-approval study for vitiligo, and I'm going to talk about that study in a few slides and explain to you what we're doing, what the endpoints are, and all about that. We have in our pipeline a very important and pivotal technology called RECELL GO. RECELL GO is, consists of a durable, so imagine a device that sits on the lab countertop about the size of an Osterizer, and that will receive the disposable that replaces the RECELL kit, currently the manual kit, with a, so to speak, a cassette.
You put the skin biopsy that you take, the skin sample, into that cassette, and you place it into the RECELL GO device along with the enzyme, and it disaggregates those cells automatically, relieving the physician of that manual work. Of course, that physician has to still oversee that. That is, of course, a part of the medical procedure, and has to make sure that all, all the elements are properly executed in terms of the proper size skin sample, the loading of the enzyme, and then, of making sure the RECELL GO device is executed properly. With respect to reimbursement that is strategic in nature, we are working towards a in-office application of the use of RECELL, which is where a vitiligo patient gets treated. We'll again, we'll talk some more about that as we go through.
What happened in the quarter? We really had a quarter with a really significant inflection for the company, to be quite simple about it. Our revenue was 42% up over the same quarter, year-over-year, was $11.7 million. A little perspective about that. We have added virtually no new burn centers in the last year, and that is because that was our indication, and that was how we configured our sales organization. If you look at it, in fact, 2022 grew 36% over the prior year. Q1 grew 40% over the prior year Q1, and Q2 grew 42% over the same quarter, Q2 last year. We have accelerated growth, which means accelerated penetration into the burn centers without adding any new accounts, virtually.
That's a very great sign around the adoption of RECELL. In Q2, in anticipation of the coming approval, June 7th, for full-thickness, which is an incredibly larger market covering level one and two trauma centers. We actually achieved our goal of fully re-expanding from 30 field commercial people to 70. Onboarding and training was actually completed ahead of schedule. We cut over to our new territory configuration in May. A little more about that a little bit later. The approval came on June 7th, and we were prepared. Our sales, new sales and commercial team were all certified and ready to support their new territories and their new customers on June 8th. Everything lined up just exactly the way we planned it.
With respect to vitiligo, we expected approval on June 16th, 2023. We received it also on that date. We're now working on pursuing the site, the site of service reimbursement, and to do that, we're investing in a postmarket study, which I'll describe in a few slides. Of course, on June 30th, we submitted the RECELL GO device to the FDA under the Breakthrough Device designation. 180 days from that date is December 27th. To achieve that, we have to fully develop the device. We have to make it... We have to test it in its final manufacturing configuration, and those, those testing results are part of our submission. This is not a device that's in process. What's in process is the submission and the approval process. Let's talk a little bit here about the full-thickness skin defect opportunity.
The broadened label for full-thickness skin defects is broader than we originally expected. We originally expected a definition that was described in the original trial design and execution as soft tissue repair and reconstruction. As it turns out, our results were quite good. We were slightly better than the primary endpoint. We achieved a p-value of 0.010 versus 0.025 in the tails of the curve, for those of you who are into statistics. What it added, and the reason it got broadened is about a meaningful percentage of the patients had had their wound for nine months, and FDA felt, therefore, that the approval should reflect not just acute wounds, but wounds that had been in place for some time and had not healed for one reason or another.
What the new label includes, after traumatic avulsion, like degloving, necrotizing soft tissue infection, where they resect the tissue similar to degloving, surgical excision of excess tissue, where resection of skin in the case of skin cancer. It's quite a broader label, and we'll get also into the detail of that as we progress in this discussion. As I mentioned earlier, we're in commercial launch, and there's really significant synergies between burns and full-thickness, between burns selling and full-thickness skin defect market. Let me spend a minute here on this slide. On the left, you see the market size we anticipated, which added 127,000 eligible procedures. Now, let me take a minute and describe where these numbers come from, because that is highly relevant.
We used ICD-10 diagnostic codes, we matched them with actual CPT code usage for skin grafting. These are real numbers attached to their real diagnosis that happened over a year period. What you can see on the left side is we were adding 127,000 eligible procedures. How relevant is this? The burn market is 35,000 eligible procedures, in the burn centers, is where 25,000 of those are, I'll come back to that. What you can see is the 35,000 is a more than tripling of our market opportunity. What actually happened is on the right, there's some of this is pending, really as a consequence of us doing the same research I just described.
On the right at the top, pending in terms of numbers, but are obvious cases and will show up at level one trauma centers. We do not have to go out of our call point to sell to them. Gunshot wounds, traumatic hematoma, surgical wounds like a muscle flap, a laparotomy, abdominoplasty, dehiscence, hydrone-- I can hardly say it. Hydrone, hidradenitis suppurativa. In any event, those cases will get planned for and treated in these level one and two trauma centers. In the lower left is what we think is the biggest opportunity in this expansion, is the surgical excision of cancer. These patients currently who have cancer and it gets excised, get a skin graft. That skin graft, of course, is autologous. With the res...
With respect to RECELL, they will get a tremendously smaller donor sample than is needed. Those patients will like that a lot. They will also find that consistent with our experience in burns, that they will get out of the hospital sooner, and that is, of course, reflection of the healing, as well. Third, a lot of times, these excisions and these grafts are in areas that are visible in their life, and the scarring is notably less with RECELL. This is a very big market, and it's actually outside of our standard call point. One of the, in terms of, full-thickness skin defects, one of the things we're working on this coming quarter is how we're going to access this market.
If, if you get inside the numbers of this, of this expansion, surgical, surgical excision for cancer is the really big opportunity that was unexpected. Take a look at this number of cases, 136,000. That's actually bigger than what we're expecting from soft tissue and itself is big enough for a RECELL business on its own. Really exciting. Chronic wounds is also a significant number, and they are included in this, in the FDA labeling. That said, we have not studied these thoroughly. Diabetic foot ulcers, venous leg ulcers, non-pressure ulcers, and pressure ulcers is an area we'll come back to in time, and we may be doing some clinical research to validate how to get the correct patient selection.
At this point, we have not done significant research there, so we, we have a little, a little bit of work to do in that area. Notwithstanding, the, the approval itself was significant and very favorable for the platform of RECELL. This, this is a slide that's meant to help you think about how the new sales force of AVITA, which is no longer burn-focused only, but rather wound-focused in burn and level one, two and three trauma centers. What you can see is these two markets interact very well. First, in the burns, where we have been, and we're in virtually every burn account, is that half of the burn centers are level one trauma centers. We have been unable to promote RECELL outside of the burn indication for all the other indications I just described until June 7.
That's an immediate market access for us, so that's a very positive synergy. On the second side, the trauma centers, this is many more centers, but in the order of level one, two and three t rauma centers are in order of 700 additional hospitals. It's a large, really a large number of new market point, market con points of selling, and it describes why we went from 30 to 70 field people. One of the benefits here is one of the first indications we'll be targeting will be the 30% of the burn market that we haven't been calling on. There's 10,000 of those cases every year. Our 25,000 burn market just became 35,000 realizable, accessible market for us. This is a, a, a tremendous advantage as we enter these hospitals for the first time.
You can see our combined sales force now has a much deeper penetration in terms of geographic coverage of burns and level one trauma centers. They overlap. It is a single sales force, and we have really a lot of opportunity ahead of us. Some additional points that are not only important but also relevant. Reimbursement's in place, and it's very uncommon for a first-in-category product to be coming to market with such a broad indication that has reimbursement in place already. Full-thickness skin defects, we use the same DRG code as burns for inpatient, and that happens immediately. When there's an outpatient treatment, which is defined as staying less than two midnights, it uses the same codes as burns. That's also effective immediately.
Of course, we get to go after, as I mentioned earlier, those 50% of the burn centers have these cases now, right? 30% of all the burns that we haven't been calling on, we have access to now. Our, our, our commercial organization is fully loaded, trained, and ready, and I can tell you, we're seeing the results, early results already. They're favorable. The activity, you know, we measure some things and, with that sales team, in terms of, you know, in the United States, most hospitals require a value analysis committee approval, which controls what new products come to the hospital. Those are our submission, and then there is an approval, then there's a first case and a second case, and we measure those, weekly, and we have a lot of momentum.
The growth synergies really strengthen our, our growth profile and, and our, our potential. Just for your edification, it'll help you see. The first-generation device, which you can see on the left, came with a whole lot of components. The ease-of-use device, just to put some perspective on it, organized all the components in a sequential flow in a large tray, and that tray is about 30 inches long and about 20 inches wide and about four inches deep. When the user opens it up, it is organized, but it is many steps to accomplish the disaggregation, cell suspension, spray on cell.
The device, the kit that is disposable, which we will also sell for the same price as the ease-of-use device and the first-generation device, which is $6,500, approximately, comes in a package that's about 30% the size of the ease-of-use device. Accomplishing one of our goals, you know, like all companies and all, all businesses in the world these days, we're trying to downsize our packaging, use less waste in how we package our, our products and develop our products. It will be about 30% the size of the ease-of-use packaging. On the right is what we call, I call the durable, and that is the RECELL GO device that sits on the desktop and on a countertop. It is not disposable.
You use it for 200 procedures, and in the new disposable kit, there's a cassette where you load the where you just put the skin biopsy and load the enzyme solution, and then you place it into this device, and you press go, and 31 minutes later, it's ready. Now we're going to switch gears a little bit. We're going to talk about vitiligo, what our strategy is and status is. The good news is we received FDA approval for our primary end, endpoint on June 16th, and that with really a significant proportion of the study size achieved greater than 80% repigmentation at six months. It was done so with using the patient as their own control, and it created a super superiority statistically against the endpoint.
This is really good news, safety, and efficacy. That said, there's more to come here because that study proved it was safe and effective. It did not demonstrate the mental health benefits that result from the cure or full repigmentation of vitiligo. Vitiligo patients, it's, it's not infectious, it doesn't kill you, it disfigures you. The patients suffer greatly from dysphoria associated with that disfigurement. It costs the insurance payers to treat that mental health, significant amount of cost over the lifetime of that patient, and those mental health conditions often cascade into other mental health, healthcare problems. For reimbursement for the private payers, this patient's about 40 years old. This is not a CMS reimbursed procedure, it's a private payer payment.
Those private payers create what's called, coverage policy, and that coverage policy has to be created for a reason. First of all, it has to help a patient. Well, this is not an aesthetic procedure, although it is aesthetic as one of the benefits. What it does, it'll take stable, segmental vitiligo patients and allow them to be repigmentized and to avoid the mental health trauma that they experience through that dysphoria. This, this is very important because it, it kinda leads to my next couple of points. The indication is the first repigmentation transplantation of melanocytes. We can transplant pigment, and it's done the exact same way as treating a wound. When we disaggregate the autologous sample, what's in it are keratinocytes, melanocytes, fibroblasts, but in it, melanocytes.
When you treat the patient, you do a dermabrasion on the site of the lesion, and you spray on the RECELL cells, and in that, in those cells are melanocytes or pigment cells, and that is the transplant. So that's, that's how it, how it works. Now, to develop the data to fully accomplish the, the needs of the private payers, we're, we have initiated a 20-site, 100-patient study, postmarket study. Note that we got approval on June 17th, and we have already started enrollment, and we've initiated sites, and we have enrolled patients. Our intent is to enroll 100 patients in a single-arm study with 80% repigmentation in 6 months as the primary endpoint.
That puts us at mid-2024, we will have the data that the medical directors of the private payers, meaning not government, they would require to pay for the procedure. The dossier, you can imagine, is one that focuses on the FDA approval. It focuses on the curative properties, that, that are experienced in the post-market study, where we capture quality of life data. There's two different scientifically validated instruments for that. One is done by the physician, one done by the patient. What it does, it measures the mental health improvement of, of the patient.
What the case for coverage for the payer is we know actuarially the cost of a vitiligo patient over their lifetime, and we now have a solution to repigment the vitiligo, and it's a cost avoidance benefit for them and of course, a life benefit for the patient. This is what we're building for. The market here for vitiligo is quite huge. It's bigger than the market for soft thickness, I mean, full-thickness skin defects and burns combined. It's a multiple times greater. Therefore, getting the foundation right is very critical. Of course, that site-of-service reimbursement, because these patients will be treated in the doctor's office, is important. Those are things we're doing.
In the meantime, we have so much to do that we, so to speak, it's great for our pipeline, not necessary for the company's growth and ultimate achievement of crossover, cash flow positive. Look at the... We're, we're, we're in the middle of a very big inflection in 2023. Full-thickness skin defects redefines the market in such a way that we have all the market necessary to build this company to achieve the growth levels and the adoption that lead to crossover profitability. Vitiligo, it becomes the, enabling really big idea, so to speak, that is real tangible. It's already FDA approved, we're already in a post-market study, we're already preparing for reimbursement. RECELL GO removes the single biggest adoption barrier.
The time taken to disaggregate the cells is actually time taken away from the physician's treatment of the patient. They get to load the RECELL GO device and go and treat the patient because these patients have other problems. It's very enabling in terms of the market. It also requires a dramatically less training by the hospital staff and commensurately our team, which makes our sales force more productive. Regarding international strategy and the Q3 earnings release, which will be in November, we'll be talking about how we're going to expand internationally. On a financial overview, this is from the quarter. You can see how we are full year into 2022, three months ended March 31 and June 30th. You can see our growth trajectory is very positive.
We're, we're making great progress towards building the RECELL platform. Looking ahead, we, we have guidance for Q2 of $13 million-$14 million, and that is $13.5 million at the midpoint, which is our target. We have raised our 2023 guidance from $49 million-$51 million, and we've raised it to $51 million-$53 million, so by 4%. This implies a fourth quarter of approximately $16.3 million. The third quarter growth will be approximately 50% over prior year. The fourth quarter growth will be in precisely 83%-87% over prior year, so that is implied in this guidance. Our gross profit continues to be very strong. It has a very big fixed cost component, nearly half, and so as our volume grows, our gross profit margin will improve continuously.
We have a very strong gross profit position. We anticipate future milestones. RECELL GO by December 27th. We expect commercial launch on January 2, 2024, and expect commercial launch of the vitiligo during 2025. The RECELL GO will mean that we're building inventory in Q4. Summary, the burn centers continue to adopt. Same-store sales are up over 40%, two quarters in a row. We've and, and now, remarkably, we have access to a market, part of the market we didn't cover, and we have a more dense coverage of burn centers with a larger sales team. We expect that to grow. full-thickness skin defects expands our market by 5x. It is just, the more time we have in the field, the better.
One of my philosophies for the sales team is no airplanes, no hotels, and don't drive more than three hours. The larger sales team will be more productive than the one that had to cover 145 hospitals across the full U.S. geography, and that's, that's a big task. Vitiligo, a patient population greater than burns and full-thickness combined. The site-of-service reimbursement is the milestone. We're preparing the fundamentals for that. RECELL GO is the fulcrum. It is what makes everything go. Vitiligo in office, requiring the dermatologist to have to spend 30 minutes disaggregating the cells when he can be treating other patients is a non-workable environment. Having RECELL GO makes it easy. The same for a burn surgeon, same for a trauma surgeon. RECELL GO fully enables that physician to treat the patient's full condition.
Our outlook for the next three to five years is strong. Our growth will be driven by burns and full thickness for that full period. RECELL GO. The adoption rates across our indications will be enhanced by RECELL GO. When vitiligo launches to market, we'll have another big growth driver. Our international expansion strategy, which is gonna be in November. We're working on it. We're making progress. With that, I think we're ready to continue. We see our mission as transforming the lives of patients with skin defects, whether they be through burn, through injury, through the condition of vitiligo.
Thank you, Jim. We'll now move on to the question and answer session. If you have any questions, you can continue to submit them using the Q&A function. I'll now hand over to Jessica Ekeberg to run the Q&A.
Hi. Thank you, Rudi. Okay, the first question is in regard to the TONE trial. How does the endpoint allow an assessment of the lifetime cost for the patient?
Demonstrate the mental health improvement along with the repigmentation. The lifetime health costs for treating vitiligo is very well documented and well published, and you can calculate it. Okay, I thought we had a technical problem. You can calculate it. You can go to the... Envision this from the study will demonstrate the 80% repigmentation at six months or better. The doctor and the patient will complete the quality of life instruments that are scientifically validated, that demonstrate the improvement in their mental health. Part of that dossier will include that actuarial analysis, where we can say, okay, to a payer, you have 20 million lives. We know 1.5% or thereabouts, have vitiligo.
The lifetime cost of treating those patients, which you predominantly are on, are cascaded from mental health conditions, are X, and you can avoid that cost when the patient's vitiligo conditions improve, such their mental health improves, and we can demonstrate that with the study. That is the connection.
Great. The next question is in regards to the Maui fires. Is RECELL being used? Is there a BARDA stockpile possibly available?
You know, when, when you develop a technology like RECELL, what we know is we're treating, in general, unique events. Time to time, in fact, the genesis of RECELL was the, you know, the bombings in Bali 20 years ago, and that's not lost on us. It happens that the hospitals in Maui are RECELL users. It also happens in the last several days that we donated RECELL kits at no charge to them to help, so to speak, support the treatment of those patients. There's so many of them, but we, we, we did make a, a, a meaningful contribution to them in, in the last, actually, literally in the last two days.
Our, our hearts are with them, our company is with them, and although they were users, we donated free treatment kits, which is better than money in that, in this case.
Thank you. Can you provide an update on the VAC approval progress on the new trauma centers and possibly a timeline for the usage in the full-thickness skin defects?
I can on a macro level. You know, I, I mentioned earlier, we measure four things, all the time. We measure VAC submissions, VAC approvals, we measure first case, and we measure second case. What we know is that when second case happens, is when the hospital commits, usually, to having inventory on the shelf, which is from a, as a practical matter, the, the, the, you know, the element of adoption. What I can tell you is every week we have meaningful movement on all of those metrics. They're going very well. We're experiencing this, the effectiveness of our new team as anticipated. That's kind of, point one. Anecdotally, we had a board meeting last week, which is on a Wednesday.
We prepared the materials for the board on the prior Wednesday, and when it came time to present to the board in one week's time, all the numbers had moved rather notably. Just in a rather short time, you know, presenting information that's outdated to the board. You know, my bad, so to speak, but, but a good positive result. This, this is going according to schedule. Our, our daily sales activity, we can see on touch activity. Of course, we use the platform Salesforce to measure how we're doing on a, from a CRM basis. We, of course, have the natural metrics of what we ship, and that, that's going in the right direction as well. I think that's the, the, the picture as we sit today.
Moving on to a question for David. David, can you comment on the reasons for the implied increase in operating expenses during the second quarter, which will result in peak operating expenses as a percentage of revenue in the third quarter?
Yes, thank you. We had, as Jim mentioned in his prepared remarks, we had the sales force up and running on board, first part of May. We had really two months of expenses for the entire sales force in general for the second quarter. That is going to increase for the third quarter, but it's not going to increase significantly because, again, there was two months out of the Q2 that we had the sales team in place. That will tick up for the sales team. We also, as Jim indicated, have started enrollment with the TONE trial, and we expect those expenses to be incurred in the second and third quarter. Our R&D expenses will increase in not in the second and third, the third and fourth quarter, my mistake. Our R&D will...
expenses will increase by the cost of the TONE study, which is estimated to be around $3.5 million-$4 million. In the third quarter, we expect our operating expenses to hit a peak as a percentage of our revenue, and then as our revenue continues to increase, as a percentage, it should go down.
Our G&A is staying relatively flat. We manage that very well. It's just the sales and marketing and R&D that will increase.
Thank you, David. Now to RECELL GO. Has production begun on the devices? How soon after approval will the devices be ready to be delivered, and in use?
Good question. In fact, the, we, we developed both the, design and the manufacturing process with an external contract a design and manufacturing firm. However, we will be insourcing both of those over the coming quarters. We have committed the resources necessary to build inventory for launch that will happen during Q4. We'll essentially start building those after the 100 Day Meeting, and I'll come back to that in a minute. We will have sufficient inventory for a full, unconstrained launch on June 2nd. Now, that is a ready now topic, we're feeling very confident.
You know, there's a lot of components that go into any manufacturing of a device like this, and we've already begin the acquisition of the necessary componentry so that we have good control of the supply chain. We're going to be fully prepared for that launch. With respect to the 100 days, in a Breakthrough Device designation, you stay on the clock, so to speak, for the 100-day 180-day review. If you have an issue with the FDA, there's a company can ask or FDA may ask for a Day-100 Meeting. It's a formal process. In the case of our last two PMA submissions for full-thickness and vitiligo, the company and FDA mutually waived that meeting. We'll go into full production right after that 100-day period, when we're 100% confident of the timing.
The next question, it's, I'll, I'll get the exact date, but it's approximately September seventeenth. So.
Thank you, still on RECELL GO, can you provide any update to the pricing structure?
Yes. Actually, we're going to sell the disposable for RECELL at the same price as we sell the current RECELL device. We'll be placing the device, the, the durable, as a loaner in hospitals, so that will not have a price or reimbursement associated directly with it. Our benefit will be greater adoption, more patients having the ability to get treated by RECELL, and that will be the economic return for the company. No, no price no price change for the disposable, no explicit cost for the hospital.
Thank you. Our last question: Can the new RECELL GO device be used for vitiligo?
It can be. It uses a different suspension in the kit, so the kit will be a, it will be different. As they're not the same, but they can be, both will be... The intention is they'll both be used within the same RECELL GO durable. We'll have one design of the automated device.
That concludes the question and answer portion.
All right. I'd like to thank everyone for their participation, and that concludes this webinar.
Very good. Thank you, everyone, for joining us.