Yahoo Finance AVITA Medical, Inc. (NASDAQ:RCEL) Q4 2023 Earnings Call Transcript
AVITA Medical, Inc. (NASDAQ:RCEL) Q4 2023 Earnings Call Transcript February 22, 2024
AVITA Medical, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the AVITA Medical Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Jessica Ekeberg, Director of Investor Relations.
Jessica Ekeberg: Thank you, operator. Welcome to AVITA Medical's fourth quarter and full year 2023 earnings call. Joining me on today's call are Jim Corbett, Chief Executive Officer; and David O'Toole, Chief Financial Officer. Today's earnings release is available on our website, www.avitamedical.com under the Investor Relations section. Before we begin, let me remind you that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements.
Please review our most recent filings with the SEC, specifically the risk factors described within the Form 10-K for the year ended December 31st, 2023, for additional information. Any forward-looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Jim for his comments.
Jim Corbett: Thank you, Jessica. Good afternoon and thank you for joining us today. I will begin today's call by discussing our financial and business highlights of the fourth quarter and full year 2023, followed by an update on our priorities for 2024. Following this update, I will turn the call over to David, who will provide commentary on our 2023 financial performance and the 2024 guidance before opening the call to Q&A. During the February 2023 conference call, I outlined our 2023 priorities, our growth strategy and committed to providing quarterly and annual guidance. Additionally, I emphasized that 2023 would mark a significant turning point for AVITA Medical, a year in which we plan to transform our business by in multiple new indications, dramatically increase our growth trajectory.
I'm pleased to report we did just that. We finished 2023 strong, delivering fourth quarter commercial revenue of $14.1 million, representing growth of 50% over the same period in 2022. This performance highlights our sustained quarterly growth trajectory. For the full year of 2023, we closed with commercial revenue of $49.8 million, representing impressive growth of 46% over the prior year. This is a significant achievement reflecting the effectiveness of our strategic growth initiatives and initial launch of full thickness skin defects, which I will address shortly. Shifting focus to our recent developments, on January 10th, we announced that we entered into an exclusive five-year distribution agreement with Stedical Medical to commercialize PermeaDerm biosynthetic wound matrix in the United States.
PermeaDerm is a transparent, flexible dressing that is cleared by the FDA for use in the treatment of a wide range of wound types until healing is achieved. PermeaDerm's high level of permeability and flexibility allow medical professionals to stretch it, giving the clinicians the ability to customize the porosity to meet the specific needs of the wound. This adjustability facilitates wound healing, moreover, PermeaDerm can be used alongside the treatment of many of our burn in full thickness skin defect cases to further aid in healing. The complementary nature of these two products and overlapping call points allow us to leverage our commercial organization to effectively integrate PermeaDerm into our selling portfolio. Our commercial organization will launch PermeaDerm during March, and we will update you on this effort during our first quarter call after we have had some experience selling to our customers.
The partnership marks the first step in our efforts aimed at expanding our portfolio of wound care products that will facilitate wound treatment. Moving on to our international expansion strategy. Last quarter, I unveiled our plans to expand into Australia and most of the European Union through third-party distribution partnerships. I'm happy to report that PolyMedics, our first European distributor, completed their resell training and launched within Germany, Austria, and Switzerland in January as expected. We will continue to update you as we identify new distributor partnerships. Turning to the PMA supplement for RECELL GO, we have completed the in-house testing that was necessary to fulfill the FDA's request for additional information. As previously stated, we expect to submit our response to the FDA on February 28, 2024.
With the restart of the 180-day real-time review, we plan to launch on May 31, 2024. Moving on to the manufacturing and assembly of RECELL GO. We mentioned during our last call that we made the strategic decision to bring the entire manufacturing and assembling process of both the durable and disposable components in-house to our Ventura facility. We will also be completing a service center for the durable that will be located in Ventura. We are on track to complete this transfer ahead of the May 31st launch of RECELL GO. As part of the in-sourcing process, we have been renovating our Ventura facility to increase capacity by 10-fold. This expansion will allow also facilitate PermeaDerm distribution. With our Ventura facility serving as the hub for housing and distributing PermeaDerm to our customers, along with our other products.
As a result of this expansion, we will have ample space for manufacturing and assembly as well as physical distribution, ensuring efficient operations for the next five years of dislocation. These renovations are being completed in phases throughout 2024 with the final phase scheduled for completion during the third quarter. While we work to enhance our operational capabilities to fuel our growth, we are also focused on the next expansion of our commercial field organization. Our primary objective during our first commercial organization expansion, which occurred in the early half of 2023, was aligning our sales strategy with our overall growth strategy by focusing on adoption and new cases for our new indication of full-thickness skin defects.
To achieve this, we strategically increased both our sales team from 30 to 70 people in our territories from 14 to 40 to maintain small sales territories and keep our growth rate high. Specifically, we aimed for our 40 territories to average under $2 million to facilitate effective coverage penetration and growth. We should be approaching the $2 million threshold during the latter half of 2024. And therefore, our plan is to expand our sales force and territories again to keep the focus on adoption and growth. Moreover, an expanded sales force will allow us to intensify our efforts in the value analysis committee process, thereby maximizing our ability to capitalize on the expanded label of full-thickness skin defects. Consequently, we are adding 38 new positions to our commercial organization, which will bring our commercial organization to a total of 108.
We expect our expanded set field team to be in place by April 1st. With our current commercial field organization and our expanded sales force, we expect to add approximately 200 new accounts during 2024. As we discussed during our third quarter call, the broadened scope of full-thickness skin defects provides us with an opportunity to pursue many different applications for RECELL. As part of this pursuit, we must access multiple physician specialties within a single facility to get Value Analysis Committee, also known VAC, approval, resulting in a lengthier sales process. We continue to affirm this expanded indication increases the patient population of RECELL by 10 times over the patient opportunity with burns. In line with the expanded label of full-thickness skin defects, we are in the design stage of developing RECELL GO mini.
RECELL GO mini is being designed to address smaller wounds, providing us with the opportunity to treat patients with less than 5% total body surface area affected. This device will have the same reusable durable as RECELL GO, will have a different cartridge that accommodates a smaller donor skin sample. We intend to submit a PMA supplement in order to achieve FDA approval by year-end. Now, turning to the vitiligo initiative. In January, we completed enrollment of 109 patients in TONE, our post-market study, evaluating re-pigmentation and its impact on the quality of life for vitiligo patients earlier than anticipated. Our initial six-month follow-up assessments are scheduled to begin in July. To strengthen the data that we are collecting, we have extended the follow-up period to include an additional assessment at 12 months post treatment.
We expect to submit both this study and our separate health economic study for publication by the end of 2024. The study dates position us to begin commercial payer coverage discussions during the second quarter of 2025. Subsequently, we anticipate a phased rollout of commercial coverage on a regional basis with the initial phase likely to begin in the fourth quarter of 2025, supported by an appropriately sized commercial organization as coverage is established throughout the United States. Before turning the call over to David, I would like to address our financial outlook. I previously committed to communicating the quarter in which we achieved cash flow breakeven and GAAP profitability. We are pleased to report that we have established a path to achieve both milestones no later than the third quarter of 2025.
In closing, 2023 marked an exciting inflection point for us, and our dedication to innovation and growth continues. We remain resolute in our commitment to unlocking shareholder value through increased adoption and sustained growth within our indications and expansion of our portfolio. I look forward to sharing further updates on our continued progress. With that, I'd like to turn the call over to David.
David O'Toole: Thank you, Jim. We continue to deliver strong financial results. In the three months ended December 31st, 2023, our commercial revenue increased to $14.1 million, $4.7 million more than the $9.4 million in the same period in 2022. Since Q1 of 2023, we have demonstrated sustained impressive commercial revenue growth rates of 40%, 42%, 51%, concluding the year with a Q4 growth of 50% compared to the same quarters in the prior year. Our strong third and fourth quarter results were largely driven by three key factors. First, we were able to capitalize on our pre-existing burn center accounts, of which half also have trauma centers, enabling us to immediately market full-thickness skin defects in those centers, thus boosting sales.
Second, we have received VAC approval on a number of new accounts. And lastly, we continue to benefit from increased adoption in the burns market. Gross profit margin for the quarter was 87.3% compared to 86% in the same period in 2022. This significant increase in gross margin was driven by the increase in sales and production of our products. As we have discussed previously, as production and sales increase, we benefit from the fact that approximately 50% of our cost of goods sold is fixed, representing the cost of the facility in Ventura. Total operating expenses for the quarter were $24.7 million compared to $15 million in the same period in 2022. The increase in operating expenses is primarily attributable to an increase of $2.4 million in G&A expenses related to stock-based compensation, consulting expenses and employee-related cost.
Additionally, we incurred an increase of $3.4 million in R&D costs, which was primarily due to employee compensation costs, including recruiting costs, accelerated recruitment and third-party costs associated with the TONE study and costs associated with in-sourcing RECELL GO production to our Ventura facility. Lastly, sales and marketing expense increased by $3.9 million, primarily due to employee-related costs, including commissions, travel, and promotion expense as a result of the expansion of our commercial organization in the second quarter of 2023. For the full year ended December 31st, 2023, our commercial revenue increased by 46% to $49.8 million compared to $34.1 million in the same period in 2022. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the launch of full-thickness skin defects through our expanded commercial team.
The gross profit margin for the full year was 84.5% compared to 82% in 2022. The gross profit margin for the year was at the higher end of our full year guidance of 83% to 85%. Total operating expenses were $86.4 million compared to $59.1 million in the same period in 2022. The increase in operating expenses is largely attributable to an increase of $15.4 million in sales and marketing costs as a result of the expansion of our commercial organization in the first half of 2023. Alongside this expansion, G&A costs increased by $5 million due to the increased headcount and related salaries and benefits, stock-based compensation, consulting fees, and recruiting costs. Lastly, R&D costs increased by $6.9 million, primarily driven by the cost of the TONE study, final work and completion of the PMA supplement to the FDA in June of 2023 for RECELL GO and employee-related costs, including stock-based compensation.
Net loss for the fourth quarter was $7.1 million or a loss of $0.28 per share compared to a net loss of $5.4 million or a loss of $0.21 per share in the same period in 2022. Net loss for the full year 2023 was $35.4 million or a loss of $1.40 per share compared to a net loss of $26.7 million or a loss of $1.07 per share in the full year 2022. As of December 31st, we had cash, cash equivalents, and marketable securities of $89.1 million compared to $86.3 million as of December 31st, 2022. During our third quarter conference call, I discussed the credit agreement we entered into with OrbiMed on October 18th. As a reminder, $40 million of the total $90 million debt facility was funded at closing. As we have discussed previously, we do not, at this time, foresee a need for either of the remaining $25 million tranches before they expire at the end of this year.
With our current cash balance of $89.1 million as of December 31st and our expectations of reaching cash flow breakeven no later than the third quarter of 2025. We are confident that we have sufficient cash reserves to achieve our goals. Turning now to our 2024 guidance. For the first quarter of 2024, we expect commercial revenues to be in the range of $14.8 million to $15.6 million. This reflects a growth rate between 42% and 50% over the same period in 2023. Our annual revenue guidance for 2024 is expected to be in the range of $78.5 million to $84.5 million, which would reflect growth between 57% and 69% compared to the full year 2023. Lastly, during the fourth quarter, we made the decision to reorganize our corporate structure and wind down our legacy foreign subsidiaries to improve the efficiency of our operating and reporting structure.
Due to the limited business operations of the foreign subsidiaries, the net impact of the restructuring was a $9.4 million foreign exchange gain or previously deferred unrealized cumulative translation adjustments in equity. This $9.4 million noncash gain was recorded in other income expense on the statement of operations. We expect the restructuring to be completed no later than the third quarter of this year, at which point our primary operating company, AVITA Medical Americas LLC, will be a wholly owned subsidiary of AVITA Medical, Inc., and no foreign subsidiaries will exist. With that, we thank you for joining us. And now I will turn the call back to the operator for your questions.
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