BTIG QUARTLY PREVIEW JULY 15,2020
Avita Medical (RCEL, Buy, $41PT): Earnings Preview:
Avita pre-announced top-line results for FY4Q20 and provided a company updateing early June. For the quarter, US RECELL System sales came in at A$6.0M (US$3.88M), which represents Q/Q growth of 2.4% and was above our estimate of A$5.5M (-5.4% Q/Q). Management previously estimated that the number of burn patients could decline up to 20% during the ongoing COVID pandemic as a result of nationwide protective orders driving a reduction in accidents. In spite of April results being the lowest monthly revenue and procedural volumes seen this calendar year, US RECELL System sales actually increased Q/Q, while estimated procedural volumes only decreased by ~4% Q/Q. It is also worth noting that Avita was able to add eight new accounts during the quarter (versus our estimate of five). The fact that Avita now has 77 total ordering accounts (represents ~60% of the total 132 US burn centers) is encouraging, but we expect COVID-19 to limit new customer acquisition efforts in the near-term. In spite of this, we think the clinical and economic benefits provided to existing customers will drive continued adoption at existing sites. Looking ahead, we expect investors will primarily be focused on updates around Avita’s plans to expand beyond inpatient burns into outpatient burns and vitiligo (as well as pediatric scalds and trauma to a lesser extent). While Avita can begin commercialization of RECELL in the outpatient burn market without any further regulatory approvals, management is seeking incremental reimbursement and FDA approval of its next generation RECELL 2.0 to assist with market access. Management expects FDA approval of RECELL 2.0 in the middle of 2021, which means commercialization will not begin until the back-half of 2021, at the earliest. In terms of reimbursement, Avita previously planned to seek a NTAP designation for RECELL, but due to the existence of long-standing CPT codes which providers may utilize in both the inpatient and outpatient hospital setting, CMS has advised management that the company does not have the ability to apply for a NTAP for use in the outpatient setting. Management has therefore elected to pursue a Transitional Pass-through Payment Application (TPT) to support separate additional Medicare payment for the RECELL System. Similar to the NTAP, if approved CMS would create a new C code and would allow the RECELL System to be billed and paid separately in hospital outpatient facilities and ASCs. RECELL's Breakthrough Device allows Avita to work with CMS through the next CMS scheduled quarterly review cycle. The company hopes to have a C code in place for the RECELL System at the start of 2021, which would set up the company to begin commercializing the product in the outpatient setting following FDA approval of RECELL 2.0 in the middle of 2021.Managementrecently announced that the FDA has approved its IDE application for a pivotal study evaluating RECELL in vitiligo, although the company is continuing to work with the FDA to finalize two outstanding study design considerations. Given management's expectations for enrollment in the pivotal trial to commence in the second half of CY20, we continue to think that the product could be approved by the end of 2021/early 2022. We previously published a deep dive piece on Avita's opportunity in vitiligo (More Than Skin Deep), and earlier in June we hosted an investor call focused on the use of RECELL for vitiligo. Our takeaways can be found here, and a replay of our call is embedded on BTIG's research portal. Beyond outpatient burns and vitiligo, Avita's pivotal trials evaluating RECELL in pediatric scalds and trauma were both initiated at the beginning of March 2020, but enrollment at clinical sites remains paused due to COVID. The company plans to assess the efficacy of RECELL in a minimum of 65 soft-tissue trauma patients, as well as in up to 160 patients with pediatric scald injuries. To date, Avita has only enrolled one patient in the soft-tissue trauma study and three patients in the pediatric scald study; however, management anticipates enrollment in both of these trials resuming in the ensuing quarter. We note that RCEL just recently completed its re domiciliation in the US, which should result in more visibility and awareness among investors; however, this comes at the cost of reduced float. While shares are still at elevated levels on an EV/Sales basis, we continue to believe that opportunities outside of inpatient burns are not accurately reflected in the company’s valuation. As a result, we view the recent pullback as an attractive entry point for long-term investors.
LLCRyan Zimmerman (212) 527-3586www.btig.com58HEALTHCARE INDUSTRY REPORT
Model Changes: We are not making any changes to our model at this time.
Valuation: Our $41 PT for RCEL is based on a sum-of-the-parts analysis. We value the existing business at $28 based on 5.0x our 2024 sales estimate of $120.9M discounted back 2.5 years at 9.3%. We add another $13 to the PT based on a 5-year discounted sales analysis of future indications in outpatient burn, pediatric scald, trauma ,and vitiligo.
