Seeking Alpha article about Avita.
https://seekingalpha.com/article/4279341-hot-potential-avita-burn-regeneration-device
Hot Potential For Avita Burn Regeneration Device
Jul. 31, 2019 12:23 AM ET|3 comments | About: Avita Medical Limited (AVMXY)
Out of Ignorance
Out of Ignorance
Long only
(3,678 followers)
Summary
Avita's FDA premarket approval for its RECELL severe burn treatment device makes it a serious contender for medical device-related risk capital.
Avita is something of a dark grey box adding additional uncertainty to an already risky play.
Avita's support from BARDA over the years gives comfort to a positive thesis for the RECELL process.
The company's passage through the danger zone from FDA approval to commercial success promises thrills and spills; adept traders will prosper, investors may choose to wait for a better entry point.
Catalysts for Avita are on the horizon.
Australian small-cap medical device company, Avita Medical (ASX-AVH), is not exactly a black box. If you search hard enough, you can find helpful information. Its ADR trades in the US as OTCQX:AVMXY.
It has been on my radar screen for less than a year based on the visceral appeal of its burn treatment device. Though sorely tempted, I have not yet pulled the trigger on even the smallest portion as I am writing on July 29, 2019.
This article reviews the stock's attraction and my reluctance to commit to the name at its current price.
Avita's FDA premarket approval for its RECELL severe burn treatment device makes it a serious contender for medical device-related risk capital.
Creative medical devices offer the attraction of technological sophistication freed from likely near-term political ructions surrounding drug therapies. Avita's RECELL autologous cell harvesting device offers significant advantages compared to conventional skin grafts in which patches of a patient's healthy skin are grafted on to a burn site.
The RECELL device harvests cells from a patient's own donor skin which are prepared in the device so that they can then be sprayed across a burn site. A four-minute video clip from Avita describes how the system works in fascinating detail, highlighting its advantages over current practice in the following regards:
RECELL advantages
RECELL's instructions for use provide a verbal description of its operation. Each device comes in the form of a self-contained kit designed for a single point-of-care use by an appropriately licensed healthcare professional. At the current time, it is indicated for patients 18 years of age and older in treatment of acute thermal burn wounds.
Avita is something of a dark grey box adding additional uncertainty to an already risky play.
Avita Medical is something of a dark grey box. As an Australian company with its ADR trading in the US as AVMXY on the OTCQX, it is a bit more difficult to unravel than would be a US company on a conventional exchange. It has no convenient 10's, -K's, or '-Q's or other SEC standbys that investors in larger US companies are so privileged to enjoy.
A search of the SEC Edgar database under "Avita" reveals thin gruel and is unhelpful. Nonetheless, I am sufficiently intrigued by its newly approved device purporting to significantly improve outcomes for burn patients. I am trying to determine if there is an investment case to be made for this.
There are no analysts covering this stock listed on Yahoo. I checked TDAmeritrade and Fidelity to the same result. One site I checked that makes reference to analyst coverage for the stock is Sidney-based SimplyWallStreet. It indicates that two analysts cover Avita, but did not name them.
The company has yet to initiate quarterly earnings calls. It offers no regular financial guidance that I have been able to uncover. Accordingly, we must make do with our own analytical efforts working from unfamiliar libraries.
Points to bear in mind when evaluating Avita are the exchange rate differential between the Australian and the US dollar, both of which use the $ sign (outside Australia, the Australian dollar would be distinguished with a prefix "A"), and also the fact that a single ADR represents a bundle of 20 ordinary shares.
Avita's support from BARDA over the years gives comfort to a positive thesis for the RECELL process.
The last thing anyone wants to imagine is a mass casualty event in the United States. Nonetheless, we can all take comfort from the notion that there is a federal agency tasked with preparing for just such an event. The "Pandemic and All-Hazards Preparedness Act of 2006" established The Biomedical Advanced Research and Development Authority (BARDA).
Potential mass casualty burn events from an improvised nuclear device radiological event brought Avita within BARDA's purview. Back in 2015, BARDA awarded Avita a nearly $17 million contract for development and procurement of autograft-sparing products that would support its preparedness for potential large-scale burn injuries.
This initial BARDA deal has blossomed. In June 2016, BARDA supported Avita with an additional $7.96 million towards its compassionate use program and its efforts to secure FDA approval for RECELL. In 2017, it further expanded its support by exercising an option for a $24.3 million contract to advance clinical trials for pediatric wound care.
Avita's passage through the danger zone from FDA approval to commercial success promises thrills and spills; adept traders will prosper, investors may choose to wait for a better entry point.
I particularly like medical device companies at the current moment with drug pricing at the forefront of 2020 election era political agendas. Nonetheless, commercial success for new medical devices is an uncertain process; it can be long and drawn-out.
I am encouraged that in its planning Avita recognizes the time that it takes to advance its device into the field. Slide 35 below from the company's May 21, 2019 RBC presentation shows:
RECELL adoption curve
This slide lists its internal estimate showing how it can take up to a year from the time a hospital begins an evaluation to the point where its use grows within a burn center.
Slide 17 below provides an overview of how RECELL has fared with early adopters and how that has translated into sales:
Avita's financial situation shows that it has apparent liquidity to address its rollout, particularly if product sales continue to grow as expected and are able to keep pace with rising costs. The company's financial overview excerpt from its slide 25 describes the situation:
Avita financial overview
I make no attempt to translate the Australian dollars into US dollars. I am more considering them as units with cash at ~$39 million and cash used in nine months of operations at ~$17 million. Assuming key drivers of cash flow are reflected on this slide, the company's cash should last comfortably beyond a year. In its half-year financial report for fiscal 2019, its then CFO Sanders announced:
The cash on hand at 31 December 2018 is expected to allow full funding of the U.S. launch and commercial sales ramp up, as well as the product development programs currently underway or planned.
While I have no reason to believe his subsequent withdrawal from the company has anything to do with this statement, I would be remiss not to mention that he resigned from the company in May 2019 to spend more time with his family. Further, Avita's 4/29/19 third-quarter report was substantially more nuanced when addressing future cash needs as follows:
Future cash requirement will be dependent upon the success of AVITA Medical’s efforts to commercialize the RECELL System, particularly in the U.S., and the timing and magnitude of clinical and other research and development programs the Company elects to undertake to expand its product pipeline. Until such time that the Company generates sufficient cash flow from operations, it expects to fund its future cash requirements through a combination of current cash resources, and potentially the issuance of shares and debt financing.
Avita's share price reaction to its September 2018 FDA authorization has been slow to develop, per the graph below:
ChartData by YCharts
Those who bought before the early spring 2019 price run-up have done very well indeed. How those who purchase at today's (midday 7/29/19) $5.53 fare is less clear. At the risk of missing out entirely, I am watching for a further pullback before dipping my toe in this name.
Catalysts for Avita are on the horizon.
In its RBC presentation slide 26, the company lists its 2018-19 actual and anticipated accomplishments as follows:
Avita 2018-19 milestones
The 2018 list is quite impressive. Its manufacturing facility reference is understated, since this deal was something of a serendipity; it allowed Avita to take ownership of a sophisticated facility designed to meet its needs and BARDA requirements complete with operating personnel.
As for the first three 2019 milestones which have already occurred, these seem amply reflected in its early spring 2019 share price run-up. The last three will play out over time. If Avita manages to ramp its RECELL sales up quickly, this will surely have a positive impact on its price. An uplisting to Nasdaq would give this stock credibility and likely lead to analyst coverage; of all the company's potential catalysts, that is one that I would particularly value. I am always uncomfortable owning stocks that do not trade on one of the major US exchanges.
As for pipeline advancement, RBC slide 19 below lists Avita's pipeline as follows:
Avita
The pediatric study is particularly interesting to parents and grandparents who recognize how quickly a moment's inattention can lead to a vicious scalding. It references NCT03626701, a study described as:
A prospective, parallel-arm, randomized (1:1) multicenter trial to demonstrate that application of autologous skin cell suspension (RES) prepared using the RECELL® device can be safely and effectively used to reduce the incidence of conventional autografting and healing time of partial-thickness burns when compared with a standardized, conventional wound dressing.
Frustratingly, this study is scheduled for a primary completion date in October of 2020, suggesting that it will make no material contribution to earnings, except possibly off-label use, until 2022 or later.
Avita's ex-US sales have been underwhelming as reported to date. In early March 2019, the company announced that it was temporarily halting its order fulfillment of orders from the EU. It was not promoting the product in the EU, so revenue impact was minimal.
At the time of its EU pullback, Avita announced its plans to expand in Japan with a marketing and distribution deal with Cosmotec, a significant player in the Japanese medical burn community. It also announced that Cosmotec had filed for regulatory approval to market its RECELL device in Japan. Per the slide above, the target for approval is Q1 2020.
I interpret this as meaning that any material Japanese revenue contribution will play out during 2021, although the company's release noted that it should be in time for any disaster preparedness, such as an earthquake in the 2020 Olympic Games.
Conclusion
For the time being, I am sidelining myself on this name. After having spent the better part of a week researching and writing this article, I see no urgency to open a position. The most likely near-term catalyst is an uplisting of Avita's ADR to Nasdaq, which its RBC slide 26 above projects for an unspecified date in 2019.
Also, I note that the company released its fiscal 3rd quarter cash flow report and update three months ago on April 30, 2019. This suggests that a new quarterly report may be forthcoming at any time. When such a report is issued, it will surely add significant color to the RECELL US rollout.
I am optimistic on Avita's prospects. As time unfolds, I will be watching for a pullback from its big early spring run-up; so long as its thesis as an up-and-coming medical device company with significant untapped growth drivers holds true at that time, I expect to begin acquisition of the name in my speculative portfolio.
Disclosure: I am/we are long AVMXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may buy or sell shares in AVMXY over the next 72 hours
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