Investor call, 12 February 21

Hi all, just got off this morning’s investor call and took some notes throughout. I was typing madly on my phone as I wasn’t near a computer, so might have missed some bits along the way, but I’ve tried to tidy it up a bit now.

Naturally, these notes are for my own benefit and future reference, DYOR, etc, but thought I’d share here in case others couldn’t make the call. No doubt they’ll issue a transcript, but I added a few points of my own throughout. Happy to hear the views of others who were on the call.

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AVH Investor Call, 8:30am AEST 12^th February 2021

Mike began calling it “a solid quarter of execution” and then noted “many of you will be new to Avita” so he provided a background of RECELL (me: I found this slightly odd as any serious investor would surely be across what the actual product is). Highlighted that revenues, whilst flat verse prior quarter, have been obviously hampered by Covid-19 (and noted this had impacted their peers). Despite this, 8 new hospital accounts added so now up to 93 accounts, noting there are 136 burn centres in the US so this is good penetration.

In terms of procedures, these were mostly flat verses prior quarter (there is more on this in “analyst questions” below). As Covid-19 abates, the sales force will be focused on driving and expanding usage in *existing* accounts. Sales reps are limited to support in accounts operating. Sales are severely limited re: in person interactions. January sales were the softest seen since the pandemic began. In February this recovered a bit by impact is still being felt (me: though IMO it’s far too early to call February and Erin Liberto noted that in the “analyst questions” section later).

Mike provided a real-life example of how things have been hindered: in California 3 individuals suffered severe burns and normally all would be candidates for RECELL. Each of the three were sent to a separate facilities due to capacity limitations. The first patient got RECELL at their facility. The second could not because RECELL was still in the VAP approval process (and this has now been completed, but wasn’t in time for that patient). The third went to a burns centre with a surgeon who had adopted RECELL but was on parental leave. In normal times all three would likely get RECELL and in-face support from reps.

The call focus then pivoted to Vitiligo and Mike noted there was very strong interest in pipeline from all parties: hospitals, surgeons, patients. This is their fastest enrolled study. He provided some background we’ll all now be familiar with: an estimated 100m sufferers worldwide including 4.5m Americans. 1.3m have Stable Vitiligo meaning their underlying auto-immune is being managed and new white spots are not appearing. Vitiligo represents a $5b opportunity in America (me: I presume he means the overall disease, not just Stable Vitiligo) and there is no FDA approved product. Sigma’s reimbursement of $38,000 (me: for their vitiligo-related treatment? Need to look into this) is a solid and encouraging signal for use of the RECELL system for re-pigmentation (me: sorry I didn’t catch all of this part so need to dig into it a bit more, but obviously the reimbursement factor is critical to a procedure adoption by surgeons).

9 additional patients enrolled to treat stable vitiligo, so total is now 11. Investigational device approval was given in early July. Seven sites enrolling patients, enrolment should complete 2021. Assuming FDA process goes smoothly, Avita expect to enter this market second half Calendar Year 2023.

In terms of soft tissue/scalds etc, there has been a material impact on enrolment because Covid-19 has taken up the beds in these hospitals. 10 sites open now which led to recruitment of 5 patients in January. Enrolment complete calendar year 2022, expect to be in market 2024 (both times he didn’t provide a quarter, just the calendar year reference, unless I missed it).

Mike then turned to growth drivers, which was a bit of a rehash of some of the ideas already explored above, however these were:

1.Reimbursement TPT support separate additional Medicare payment for use in outpatient setting. No reason to believe the delay is anything beyond Covid-19. Pilot ready to approach commercial payers for support. Should be approved end of calendar 2021, launch into segment 2022.

2.They are looking to broadening the geographic footprint in coming years. “We continue to seek approval in Japan”. They completed the three required tests in July 2020, but “At this time due to the broad labelling applied for I do not have an update for when RECELL will get PMDA. We continue to prioritise the US, but we are constantly looking at opportunities to enter ex-US markets” (me: personally I felt he walked this back a bit when it was questioned by Bank of America, see below under “analyst questions”. So this was a bit odd. But whatever, the US is the hunting ground and as I’ve noted in other posts, I want them to nail this before opening shop overseas).

3.They aim to have Vitiligo approved and on market 2023, soft tissue/trauma on 2024. “I have no clear line of sight on pediatrics enrolment” as noted above due to Covid-19.

4.Working on moving forward with cell and rejuvenation projects. Plans to speak to FDA end of 2021 to plan a path forward into clinical trials.

5.Marketing: “this year at ABA we have 15 abstracts utilised to use the RECELL system. There were 7 articles publish in peer-reviewed journals in 2020. For 2021 we already have 7 articles under review.”

Otherwise, some general points about growth: expect the adding of accounts to slow down now they’re in 93/136 burns centres (so almost 70% penetration). Important to note that half of revenue comes from 20 accounts but they don’t think this is unusual at this stage of growth. However it does demonstrate a few important points (negative and positive). Firstly, top line revenue could be very sensitive to closure of a top 20 centre due to the reliance on what they call their superusers”. However on the positive side (and this really jumped out to me), it shows a great opportunity to dive more deeply into their many *other* accounts once Covid-19 begins to abate. Given 20 accounts are providing half of all revenue, that leaves 73 to really get into and ramp up. This explains the early comment from Mike that their focus will be on their existing customer base, not just getting new hospitals on the books. Note this point was discussed further under “analyst questions” below.

We then went through the financial numbers which I won’t rehash as these are all clearly laid out in the announcement, but I was very pleased to see the net loss narrow. They noted the improved gross margins were due to increased shelf life, decreased shipping cost. The increase in R&D due to Vitiligo and Pediatric scalds research and enrolment.

That brings us to the fun part…!

ANALYST QUESTIONS

There was nothing too funky here to be honest. Generally we just did a bit more of a dive into the points already outlined above, although I was pleased to see an analyst query about any capital raisings on the horizon (spoiler alert: no straight answer was given).

Josh, Cowan

Question: Covid-19 impact is well documented now (me: agree, thank you. Can everyone stop panicking now and be a bit more forward looking please!). My question is on Vitiligo… the deeper we dig more enthusiastic we get! What can you tell us about efficacy data for MKTP. Answer: very strong data but only a few centres and very costly, so not very scalable (me: sorry I missed part of this answer due to a bad connection in the car).

Kevin, Oppenheimer.

Question: Talk us through underlying assumptions re: TPT code, hoping to begin having discussions with payers. What’s the latest communication? Timeline for contribution in 2021? Timeframe for having some priority? Answer: we started off with an end path, an add on payment. We were specifically directed by CMS to go through the TPT. We remain confident we’ll get it. CMS is delayed due to Covid-19 but we have no reason to believe anything in the application is being questioned. They are looking at applications on a quarterly basis so 1 April we’ll hopefully see the C-code coming through. Once we get the code, Medicare/Medicaid is less than 15% of people in hospital so we need to get commercial partners lined up. Once we get the code we’ll do a pilot launch at six centres to check that procedures are getting paid and if rejected, then we can work through why. Once we’re confident there’s good coverage we’ll roll it out further.

Ryan, VTIG

Question: 20 burn accounts, what’s the utilisation within those accounts. What capacity is there to grow within those ones (absent Covid-19 dynamics). Answer: top line on those 20 accounts (“superusers”) they have a couple of surgeons who are looking at RECELL the same way we do; any burn needing a skin graft, RECELL has a role for application, and will be the best SOC for the patient. “They’re looking at RECELL whenever they’re thinking about skin grafts”. For the others is just an adoption curve. Typically they start with large burns, 30%, deep, so they can combine RECELL with other treatments i.e. mesh. Then they start moving down to smaller wounds and deep-partial thickness wounds where they can use RECELL alone. Some accounts are using RECELL 30% or 40%. The smaller ones are using it like 8% so want to get them higher but they won’t necessarily get to 30% or 40%. The vitiligo enrolments aren’t competing with Covid-19 beds, it’s plastic surgery wards, etc, so that’s positive.

Brooks, Lake Street Capital

Question: What are you trying to do to take 93 accounts to 136 (me: I thought this was an odd question given they had previously flagged the important of growing the existing accounts). Answer: as Covid-19 lightens up and we can actually sell that will be a focus. We have a dozen KOL’s (me: help with lingo please?) to help us with training. We’re connecting the surgeon and then the surgeon shares their experience and they have a private 1-1 dialogue where they can speak together and solve. That normally results in a case within a week (me: I presume he means within a week that surgeon uses RECELL?). They’re doing lots of training and education with a big focus on keeping content fresh and new all the time to stop “all these zoom calls getting stale”. Question: How’s morale in the sales organisation? Has Covid-19 and endless Zoom calls had an impact on your people? Answer: in general for the company there’s a strong level on engagement. Because people are WFH we’re seeing longer work hours. It’s challenging they’re not in person, but he noted we’re doing “all the usual fun things with HR over Zoom”. Mike mentioned a return to the office when they have “a good proportion of our employee are vaccinated” (me: this gets further questioned below). Erin talked about the sales team: “In sales it’s frustrating. Regional conferences cancelled; sales diminished. However reps are feeling great full and supported. Compensation targets been adapted to help them – obviously not everyone is hitting targets. It’s not 100% commission on sales base, there is a base salary. Lots of turnover in the hospital which is tough but reps are travelling less which is positive and they’re not seeing turnover in the sales space.” Mike added that in the Ventura manufacturing centre employees come to work on daily basis and that continues as normal and morale/performance there is good, “we’ve seen no interruptions in our supply chain through this period” (me: great news… hopefully it stays that way).

Leanne, Bank of America

Question: You noted expansion of markets outside US, aside from Japan as mentioned, but which other countries are you considering and what sort of timeline would that be? Answer: right now with just burns, it’s negative ROI going to Europe or Australia due to a couple of things. Number 1, the work/spend required for local clinical trials and number 2, the lower incidence of burns. Other than Japan, three years is probably the pivot point when we’re start looking at re-launching but the ex-US focus would be Vitiligo. Question: On the cash balance, is there enough in the bank to push through the current pipeline (including Japan) or can we expect to see capital raises? Answer: In Japan: once there is approval from PMDA, it goes to Ministry of Health, Labor, Welfare to set the reimbursement price, then COSMOTEC are ready to be execute the sales strategy (he said revenue is about 50/50; I’m not sure if he’s talking about the split between the two companies). Noted they are burning around USD 6-8m per quarter. “Revenue from burns business will fuel our pipeline”, and we will be “opportunistic” regarding capital raising (me: I felt this was a vague answer but I can understand why Mike would be cagey on this). Question: have procedures started to recover? Answer: we haven’t given guidance or provided numbers on month-to-month revenue. Some historical references have been provided relative to procedural growth. January the software but that was partly due to loading of accounts; various centres or hospitals will buy inventory and different tiers of discounts. It’s also the end of compensation period. The number of procedures were not as soft as sales, they are consuming product on the shelf. It’s early February but they’re seeing continuation of that consumption. Hospitals have given feedback that there’s lower admissions due to lockdowns and the Covid-19 flare up in December/January.

John, Bell Potter.

Question: On the progress of vaccine rollout. 35m provided so far, have Avita staff had access? Can you say we can optimistically have a view that once the front line staff get vaccinated there’ll be more non-Covid-19 admissions to hospital (me: leading question, your honour). Answer: highly variable as it’s being managed at a state level not a federal level. Some states are well into vaccinating their front-line workers and some have not started (me: say what?!). Even if the front-line workers are vaccinated there’s still patients with Covid-19 so it’s complicated. Burn beds get turned into Covid beds. That doesn’t permit our reps to get more access to the hospital. Question: So it’s likely to be many more months before we see a trend change. Answer: Unfortunately, yes. This is being determined state by state. Very, very difficult to predict even by the experts.

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So… I’m very interested to hear other people’s thoughts. At time of posting, SP has been down between 4-6% but to be honest there was nothing in that call that surprised me!

I still love this product (and hate Covid-19).

Cheers

mondy