Avita Medical Ltd (RCEL)

[Billr05]

FROM BTIG - report was dated 9/22/20

Avita Therapeutics, Inc.(RCEL, Buy, $41 PT)Takeaways from Investor Meetings: Burn Market Continues to Improve and Multiple Pivotal Trials Provide Upside to Shares; Reiterate Buy and$41

WHAT YOU SHOULD KNOW: On Monday, we hosted investor meetings with the RCEL mgmt. team that focused on a variety of topics, including recovery trends in the inpatient burn market, clinical trial timelines, progress on reimbursement and approval of RECELL 2.0 for outpatient burns, and other key value creation events. RCEL continues to be a name that many investors are just getting to know, but we expect interest in the company to continue to increase as we move towards a number of significant value creation events in 2021 that could expand RECELL's addressable market well beyond its current $200M. In our view, expansion into future indications has been relatively de-risked by RECELL's existing PMA for use in inpatient burns, and while there maybe some time before approval, we continue to think RCEL is attractive at these levels, especially for long-term investors. We are reiterating our Buy and $41 PT.

¦Update on progress in vitiligo pivotal trial. In July, the FDA approved RCEL's IDE application for a pivotal trial evaluating the RECELL System in vitiligo. The first patient was treated in this trial last week, and mgmt. repeatedly pointed to strong demand from both physicians and patients. In terms of trial design, 84 patients will be evenly split into three treatment arms with each group receiving a different dilution of spray-on skin cells (cell suspensions prepared at 1:5, 1:10, and 1:20)and NB-UVB for a portion of their depigmented lesion. For comparison, RECELL is typically used at a 1:80 dilution for burns, pediatric scalds, and trauma, and vitiligo patients that have been treated in the US to date have received cell suspensions prepared at 1:20. Each patient will also serve as their own control, with a portion of the depigmented lesion receiving treatment exclusively with NB-UVB. Mgmt. noted that there will be an interim readout after 33 patients at some point next year, but the company is still working with the FDA to figure out the exact primary outcome (although the study's page on clinicaltrials.gov — found here — defines responders as those patients who achieve at least 80% repigmentation). Enrollment is expected to be completed around this time next year, setting up RECELL for clearance potentially in FY22.

¦Current trends in inpatient burns. Recently, mgmt. announced that sales of the RECELL System in July were $1.8M, which represents the highest monthly sales since its US launch in January 2019. For FY1Q21, mgmt. is guiding to sales exceeding the $3.9M recorded in FY4Q20, and while this seems conservative considering results in July, it is worth noting that July is always the strongest month of the year. RCEL has historically reported detail around the number of burn centers with Value Analysis Committee (VAC) approval and burn surgeons trained on RECELL, bu tmoving forward we expect mgmt. to shift towards giving data around the number of unique account orders and physicians using the RECELL System. To that end, there were 57 unique account orders (out of 134 burn centers in the US) and more than 90 physicians (out of 300 burn surgeons in the US) used the RECELL System in July. We expect increased penetration and more frequent usage of RECELL among surgeons who have already adopted the product to drive top-line growth of ~75%and ~55% in FY21 and FY22, respectively.

¦Valuation: Our RCEL rating is Buy. Our $41 PT is based 10.5x our estimated FY24sales discounted back 2 years. Risks are discussed below. September 22, 2020

Ryan Zimmerman(212) [e-mail]
Max Smock(212) 588-6586 [e-mail]

Company Data Closing Price$26.82Price

Investment Thesis
With clinical data showing efficacy, improved cost-effectiveness over competitors, and lower donor site requirements relative to S.O.C., Avita’s foray in the US inpatient burn market is encouraging. More exciting is the broad array of potential treatment applications RECELL may be able to target combined with the technological simplicity of the product (~30 mins at the bedside).Avita has targeted future indications including outpatient burns, pediatric scalds, trauma, and vitiligo, which represent a $2B+ TAM. We see RECELL’s potential as even larger when considering potential applications in wound, aesthetics, and cell therapy.


Additional Takeaways

Status of reimbursement efforts and approval timeline for RECELL 2.0 in outpatient burns. While RECELL can currently be commercialized 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. In regard to the former, mgmt. previously planned to seek a NTAP designation for RECELL, but based on feedback from CMS, the company is now pursuing a Traditional Pass-Through Payment Application (TPT) to support additional Medicare payment. Mgmt. indicated that the TPT has been submitted to the FDA, and the expectation is for a decision to be made by the end of 2020 which will go into effect at the beginning of 2021. Given RECELL's Breakthrough Status, there is a high likelihood that RCEL receives pass-through status for a period of time. In terms of FDA approval for RECELL 2.0, RCEL is in the final stages of preparing to apply for approval, and submission to the FDA is expected early in FY21. This is in line with previous commentary from mgmt. that FDA approval of RECELL2.0 is expected in the middle of 2021.Expansion into pediatric scalds and trauma likely at least a couple years away. RCEL's pivotal trials in pediatric scalds and trauma were initiated prior to its ongoing pivotal trial in vitiligo, but mgmt. was less specific around the timeline for approval in these indications. The company plans to assess the efficacy of RECELL in a minimum of 65 soft-tissue trauma patients, and while enrollment is starting to pick up, it is still going slower than anticipated due to COVID. In pediatric scalds, mgmt. plans to assess the efficacy of RECELL in 160 patients. RCEL continues to make progress with a few patients now enrolled and two new sites just coming online, but similar to the trial in soft-tissue trauma patients, the trial is expected to take at least a couple years. However, there is an interim readout from the pivotal trial in pediatric scalds planned at 80 patients, so we think investors will likely get an initial look at data at some point in late 2021 or early 2022.

Model Changes
RCEL recently filed a 10-K for the previous fiscal year denominated in USD. Our previous model, which we used while RCEL was domiciled within Australia, was built on AUD. As a result of the recent filing and the updated US-based domicile, we have updated our entire model to reflect RCEL's USD financial history.
BTIG, LLC Ryan Zimmerman [phone]www.btig.com3