Avita Medical Ltd (RCEL)

[soseano]

Prior seeking alpha article

http://seekingalpha.com/article/1916471-4-bold-biotech-calls-for-2014

Prediction # 3: Avita Medical Will Be Acquired

We started looking at Avita Medical (OTCQX:AVMXY) In June 2013. Back in June 2013, we concluded that the company's leading product, ReCell® Spray-On-Skin™ was simply the best product on the market for pediatric burns and scalds. ReCell® is the company's autologous cell harvesting, processing and delivery kit that enables surgeons and clinicians to treat complicated skin defects, including chronic wounds, scars, burns, depigmentation, and aid in rejuvenation or reconstruction procedures quicker, easier, and cheaper than the current standard of care for each indication. ReCell® Spray-On Skin™ uses a patient's own skin cells to facilitate a regenerative process during which new skin is regrown. The cell suspension, which is sprayed onto an affected area to be treated, contains the appropriate mixture of healthy cells of different types to promote healing (keratinocytes and skin stem cells, or progenitor cells), skin structure (fibroblasts) and cells that reintroduce normal color (melanocytes) in areas where the pigmentation has become too dark or white as a result of injury, scars or disease. ReCell has been successfully used to:

- Close acute wounds due to burns of scalds.

- Heal chronic wounds, e.g. diabetic foot ulcers and venous leg ulcers.

- Improve the appearance of acne scars.

- Remove areas of discoloration, including both hyperpigmented and hypopigmented areas.

- Restore pigmentation to stable Vitiligo patients.

- Improve and enhance the appearance of scars from trauma, burns, surgery and other causes.

Avita's ReCell® compared very favorably to the current gold standard for treating burns and scalds, which is classic split-thickness meshed skin grafting. Results from the 82-patient 2007 study showed ReCell is a feasible, simple and safe technique. The product gives similar results to meshed skin grafting on healing and epithelialization time, with similar functional outcome, but with significantly less pain and post-operating healing on the biopsy site. This is because the ReCell® system allows for 80-fold expansion from the postage-stamp sized biopsy site to the treatment site vs. classical meshed skin grafting which can afford only a 2-to-4-fold expansion.

Avita's clinical and case study data is nothing short of fantastic. We have highlighted the company's efforts in burns and scalds and for the treatment of venous leg ulcers in two separate more detailed articles on Seeking-Alpha. A U.S. Phase 3 study in burns and scalds is currently ongoing. The venous leg ulcer study is being conducted in Europe. Our analysis shows that ReCell® is a potential $250, with upside to that figure based on the outcome of additional clinical programs in vitiligo, and in aesthetics and reconstruction. The product sells for around $1,000 per treatment, which will still offer favorable reimbursement to the would-care professional under the new CMS reimbursement guidelines for ambulatory surgical center payments.

The reasons we believe Avita will be acquired are three-fold. Firstly, the stock is incredible cheap. The current market capitalization is only $25 million, and ReCell® is already approved and on the market throughout Europe generating around $3 million in revenues. Avita also collects license and collaborative payments from distribution partners, bringing total revenues to around $4.5 million. We believe that ReCell® offers $250 million in sales potential once approved in the U.S. and fully-reimbursed in Europe. Operational overhead is low, and thus the company could represent tremendous leverage to an acquirer at this stage.

The second reason is the changing reimbursement market, brought on by the recent finalized legislation enacted by the U.S. Center or Medicare and Medicaid Services (CMS). These new payment rules are designed to package both wound care products and procedures into one APC code for both ambulatory and in-office care. The decision is good news for some and very bad news for others. For example, we think Cytomedix (OTCQX:CMXI) will do very well given the new procedures, whereas competitors such as Shire Pharma (NASDAQ:SHPG) and privately-held Organogenesis are in trouble. We expect fewer reimbursement dollars to go around starting in 2014, and thus see a wave of consolidation on the horizon for key players in this space as they attempt to maintain market share and improve economies of scale. Potential acquirers of Avita include Osiris Therapeutics, Shire Pharmaceuticals, Smith & Nephew, Kinetic Concepts, and Cytori Therapeutics.

The third reason we believe Avita may be in play is the recent resignation of the CEO and Chairman of the Board. Out are William Dolphin as CEO, and Dalton Gooding as Chairman. In is Ian MacPherson as interim Chairman. Current CFO, Tim Rooney, was appointed as interim CEO. Through our time covering Avita's stock we have heard of significant shareholder angst, especially in Australia, the company's founding roots. Issues include management pay packages, increasing losses, and delayed timelines for enrollment in the company's clinical trials. Avita has relocated from Australia to just outside Los Angeles, CA. It's at the epicenter of the regenerative medicine movement. The company may very well bring in a new CEO in an effort to right the ship. Then again, with the stock so cheap and consolidation likely in 2014, we would not be surprised to see them scooped up.