Avita Medical, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Abita Medical, Inc., fourth quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today. Caroline Corner, you may begin.

Thank you, Operator. Welcome to Aveda Medical's fiscal fourth quarter and full year 2021 earnings call. Joining me on today's call are Mike Perry, President and Chief Executive Officer, and Michael Holder, Chief Financial Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding the markets in which Aveda operates, trends and expectations for Aveda's products and technology, trends and demand for Aveda's products, Aveda's expected financial performance, expenses, and position in the market, and the impact of COVID-19 on Aveda's operations and Aveda's customers' operations. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results, performance, or achievements to differ materially from any results, performance, or achievements expressed or implied by the forward-looking statements. Please review AVIDA's most recent filings with the SEC, particularly the risk factors described in AVIDA's S3 and 10-K filings and in AVIDA's quarterly report on Form 10-Q for the fourth quarter ended June 30th, 2021 for additional information. Any forward-looking statements provided during this call, including projections for future performance, are based on management's expectations as of today. Avita undertakes no obligation to update these statements except as required by applicable law. Avita's press release with fourth quarter and full year 2021 results is available on Avita's website, www.avitamedical.com, under the Investors section, and includes additional tips about Avita's financial results. AVIDA's website also has the latest SEC filings, which you are encouraged to review. A recording of today's call will be available on AVIDA's website by 5 p.m. Pacific time today. Now I'd like to turn the call over to Mike for his comments on fourth quarter 2021 business highlights.

Thank you, Caroline, and thank you, everyone, for joining us today. We made strong progress on our growth objectives in the fourth quarter. As you know from our pre-release in June, commercial revenues decreased not including BARDA-related revenues, were strengthened substantially in the quarter, up 45% quarter over quarter, reflecting reopening of parts of the economy, which led to a corresponding increase in accidents, as well as continued penetration into our burn center accounts as we began to see some improved access to hospitals and increased procedures. While it would be premature to say that the pandemic is behind us, especially given recent developments with the Delta variant. We are encouraged by our recent commercial performance and remain extremely excited about the opportunities ahead with our pipeline indications. Here at Aveda, we are driven by our primary goal of commercializing our proprietary technology to enable healthcare providers to successfully address skin defects to save lives and improve quality of life for our patients. As we grow from treating burns to trauma to vitiligo to cell and gene therapy and to aesthetics and beyond, our focus is on delivering leading-edge therapeutic skin restoration solutions to our patients. While the company was founded with burn treatments in mind, our team is working to leverage our point-of-care autologous spray-on skin platform across many markets and indications and I'm very pleased to update you today on our latest developments. With that, I'd like to turn now to our burns business. As a quick update on the product development front here, at the end of June, we submitted to the FDA a PMA supplement for our new version of the resell device with enhanced ease of use. We anticipate FDA approval in the first half of calendar 2022, and commercial launch thereafter. In our fiscal fourth quarter, we saw COVID abating in many geographies which led to various degrees of economic and social recoveries, which in turn resulted in a corresponding increase in accidents. Our sales team was able to regain some momentum with our customers, which is reflected in our revenue results. I'm very proud to report that our resale commercial revenues were a record $6.7 million in the fiscal fourth quarter compared to $4.6 million in the previous quarter ended March 2021. We realized this significant revenue growth primarily from the increase in burn cases, but also from our commercial teams further penetration in burn center accounts. Our organization remains well positioned to respond and quickly pivot to changes in burn-related accidents. We have been building our burns-focused sales force for over two and a half years and believe we have the largest and most experienced burns-dedicated sales force in the market. In the quarter, we saw increased penetration into accounts and procedures spanning all burn sizes, including smaller burns, which has been our focus of late. Approximately 80% of our burn cases come from these smaller wounds or wounds comprising less than 30% TBSA or total body surface area. We ended fiscal 2021 with over 100 hospital accounts, with the ABA estimating that there are 136 burn centers in the United States, and as we've mentioned previously, we feel that we have established a solid footprint in burn center hospitals. Our focus is now on driving utilization and broadening penetration within this footprint. We believe our recent sales performance illustrates success with implementing this plan. Revenue from our top 20 accounts increased approximately 25% in fiscal Q4 over fiscal Q3, demonstrating strong growth. If we look back a year ago, our top 20 accounts were contributing 66% of our burn revenue. Today, with a much larger revenue base, Our top 20 accounts are delivering just over 40% of revenue, reflecting utilization across a broader base of burn centers. With over 50% of burn surgeons using Resell in the Quarter and over 80% of the approximately 300 U.S. burn surgeons trained to use the Resell system, we have indeed established a broad user base. As we look ahead, our sales force will be focusing primarily on driving and expanding usage and adding surgeon users within our existing accounts. As the Delta variant spreads, we are seeing increased access restrictions and we anticipate a potential impact on the availability of burn beds, particularly in the south. Of note, data from an ABA-sponsored series of surveys between April through August of 2020 showed that of 2,082 burn beds identified in the United States, only 845 beds or 40% were available in April of 2020, and a mere 572 burn beds or 27% were available in August of 2020. The impact we saw last year during the COVID peak did influence our sales, and while we don't currently think The Delta variant will be nearly as disruptive and we are not currently seeing an impact on burn bed availability. We are prepared to pivot and deploy our learnings from the prior waves of COVID. Moving forward, We continue to leverage our sales force's deep relationships and experience, our training capabilities, physician engagement programs, and new outreach efforts to educate and engage burn care providers. Today, our sales force is able to access most accounts to support cases and aftercare and to perform training. During the fourth quarter, we saw substantial traction in small off-site Aveda events, and these live sessions drove physician understanding of incorporation of resale into their daily practice and correspondingly our revenue increase. This summer has been slow in terms of professional meetings due to the pandemic status and the impassioned restart of vacations, yet we expect resumption of regional meetings in the fall. While meetings and conferences are currently planned to be in person, they may change to virtual as a result of the spreading Delta variant. Fortunately, enthusiasm from physicians has been very high, and we have been successful in the past at adeptly pivoting to virtual meetings. So we will continue to be flexible as necessary with our participation at meetings and with our physician interactions. With our recent label expansion to treat full thickness thermal burns in patients one month of age and older, in July we rolled out a campaign targeting pediatric burn treatment. As you may know, unfortunately, nearly a quarter of all burn cases in the United States occur in children under 16 years of age. One of the main goals within the burn community and here at Aveda is to avoid painful surgeries, scarring, and multiple grafting procedures. From analysis of our continued access and compassionate use data, resell significantly reduced the mean number of pediatric grafting procedures compared to national burn repository data. Our results showed 1.6 grafting procedures using resell in combination with grafts versus 3.6 procedures using conventional split thickness skin grafts, which is a very compelling improvement given the pain and scars that patients endure. While we do not expect the pediatric label expansion to move the needle significantly on our top line revenue in the near term, we can now engage burn centers that are pediatric only facilities and we are now providing a comprehensive commercial effort that is able to address the vast majority of burn patients. Our commercial team is finding that our new label is reinvigorating conversations. For example, after an extended sales effort, UC Davis, one of the largest U.S. burn centers, recently added resale to their formulary, driven in part by the new expanded label. You may have seen a recent news report in late July in Yonkers, New York, of a mother and child being hit by an alleged drunk driver. The child was pinned under a car and was severely burned. I'm very pleased to tell you that Resell was used successfully to help that child. In seeing these heartbreaking cases, it is truly a privilege to be in a position to make a meaningful difference in the lives of these children and their families. Another area of important impact for us is the subject of injuries not originating from burns. The reopening of the economy and the corresponding increase in accidents meant that in the fourth quarter, enrollment in our soft tissue reconstruction trial accelerated. As a reminder, this trial involves non-burned wounds, such as those with necrotizing soft tissue infections and degloving injuries, which are wounds that commonly present at the same trauma centers where we are currently serving our burn patients. If you recall, we had our first patient in this pivotal trial enroll in March 2020, and we saw slow enrollment for the first year due to the pandemic. We have 17 participating sites with 32 subjects enrolled and treated as of June 30th. Over the last two quarters, we have seen patient enrollment ticking upwards. For instance, during July, eight additional patients were enrolled. Three patients have been recruited so far in August, and our goal is to complete recruitment of all 65 patients by late 2022. With a six-month follow-up for patients in this trial, we are aiming for an approval in calendar year 2024. We will be leveraging our existing trauma and burn center sales point and incrementally growing our sales force to address this opportunity. Patients presenting with a requirement for skin grafting and resell, whether for burns, trauma, or other skin repair, are routinely treated by the same surgeons within an institution. We already know some of our top accounts are using resell for trauma as they seek to find the best outcomes for their patients. As an example, a top surgeon at University Medical Center in New Orleans, which is one of our top 10 accounts, has told us that approximately 10% of their resell procedures are currently performed on trauma patients. Based on our internal calculations, we foresee a serviceable addressable market, or SAM, for trauma and soft injury of $450 million. Moving on now from burns and trauma to our continued progress in vitiligo. For those unfamiliar with the condition, vitiligo is a skin disorder characterized by depigmented areas of skin that appear as white spots or patches and which are primarily attributed to an underlying autoimmune disorder in the patient. There are an estimated 100 million sufferers of vitiligo worldwide, including up to 6.5 million Americans. Of those in the US, we estimate approximately 1.3 million have stable vitiligo, meaning that their underlying autoimmune disease is being well managed and that their disease is not continuing to spread. we estimate the opportunity for resale to repigment stable vitiligo patients in the U.S. is at least $5 billion, and there is no FDA-approved product presently available to enable repigmentation for these patients. Recently, FDA approved our proposal for a single-arm vitiligo trial powered with 23 subjects with each site required to complete treatment of a run-in subject for purposes of training. As a reminder, our original trial was a three-arm trial with 84 patients. While this means we will restart enrollment, we already have 15 centers up and running, a robust recruitment program, and we continue to expect that enrollment will be completed by the end of calendar 2021, and we continue to plan for approval in 2023. To further support this opportunity, our products team is developing a new, fully automated version of the resale system tailored for the dermatology setting. This is being designed to support our commercial plan for Abitiligo, and I look forward to updating you as we progress. Work advances in our collaborations with the University of Colorado, Gates Center for Regenerative Medicine in Epidermolysis Bullosa, or EB, and with the Houston Methodist Research Institute in rejuvenation. In both cases, we are successfully demonstrating the intended molecular and cellular changes in the laboratory setting, and we are now shifting to toward demonstrating that these modified cells will form new skin in animal models. These programs both aim to show preliminary proof of concept by the end of this calendar year. I'd now like to walk you through the growth drivers we see ahead. We continue to drive forward on physician engagement and education, whether in person or virtual. Notably, our discussions with burn surgeons have largely shifted from whether or not to use resell to a focus on optimizing the use of resell, as well as training and refining the expertise of supporting staff. Our commercial team will be continuing to drive penetration into our burn center accounts. We are VAC approved in what we believe is a critical mass of burn centers, and with that, we are focused on penetration within those accounts. We have shown that our strategy of driving it to smaller burns results in overall broader resell usage. And looking ahead, we are leveraging our educational efforts and our expanded label and pediatric campaign to drive more engagement. In late July, CMS released the 2022 Medicare outpatient prospective payment system proposed rule, which contains a review of resales transitional pass-through or TPT payment application. We anticipate the final rule will be published before calendar year end with payment going into effect in January of 2022. Assuming a successful outcome, A C code will be assigned to resell, which we anticipate will cover the cost of the device for all Medicare and Medicaid patients. We would then commence a pilot launch at key sites to ensure coverage with commercial carriers before initiating a broader nationwide launch, likely in mid-2022. Our pipeline initiatives are moving forward. Specifically, our trauma and vitiligo clinical trials continue to make gains toward completion. We are especially excited about both our new single-arm vitiligo trial as well as our soft tissue trial enrollment, which has 43 of 65 patients enrolled and appears to have benefit from the recent increase in trauma-related accidents. We continue to be optimistic about our preclinical pipeline work in epidermolysis bullosa and rejuvenation and expect to have demonstrated proof of concept by the end of the calendar year. I look forward to sharing our progress there. Today, we are much more than a burns business. Moving to our last growth driver, we anticipate broadening our geographic footprint over the coming years. Together with our commercial partner, Cosmotech, we continue to seek approval in Japan. As previously reported, we completed the three required non-clinical benchtop studies in August of 2020 as scheduled. The Japanese Health Authority has recently undertaken their good clinical practice or GCP audit related to Evita Medical with no exceptions noted to date. COSMETEC will meet with the Japanese Reimbursement, MHLW, or Ministry of Health, Labor, and Welfare to present RECEL for reimbursement review in the near future. Our efforts and interactions with COSMETEC and the Japanese Regulatory Authority are ongoing. and we continue to expect approval by calendar year-end 2021 of our application for marketing approval of the resale system under Japan's Pharmaceuticals and Medical Device Act, or PMDA. We are also planning reentry into other U.S. markets following U.S. approval of new clinical indications for the resale system. At that time, We expect to have sufficient economies of scale provided through multiple resell indications to provide adequate ROI to justify the significant investment required in sales force, infrastructure, training, and reimbursement activities so that we can leverage our existing resell CE mark and TGA registration. In summary, We accomplished a lot over this past quarter. Our legacy burns business showed strong growth. We received approvals for expanded burn indication covering pediatrics and extensive burns. We submitted a PMA supplement for a new resell device. We made significant strides with our two lead clinical trials, and we've made strong progress on our pipeline and product development front. With that, I'll now turn it over to Michael for details on our financial performance in the quarter. Michael?

Thank you, Mike. In the fourth quarter ended June 30th, 2021, total net revenue increased 166% to 10.3 million, compared to 3.9 million in the corresponding period ended June 30th, 2020, and compared to 8.8 million in the prior quarter ended March 31st, 2021. In the fourth quarter, resale commercial revenues increased 72% to $6.7 million compared to the prior quarter, while resale revenues associated with Biomedical Advanced Research and Development Authority, BARDA, were $3.6 million and attributable to the delivery of resale units for emergency response preparedness. Gross profit margin was 80% for the fourth quarter of 2021, compared with 77% in the corresponding quarter last year. The increase in our gross profit margin resulted from lower shipping costs and increased production. Operating expenses were $13.4 million in the fourth quarter of 2021, compared with $16.5 million in the same quarter last year. The decrease in operating expenses is primarily attributable to lower stock-based compensation along with higher costs in the prior period associated with the redomicile transaction, partially offset by higher costs in research and development in the fourth quarter. Lower stock-based compensation in the fourth quarter was driven by certain performance milestones being met in the prior year. Higher research and development expenses have resulted from a ramping up of clinical trial-related activities related to vitiligo and soft tissue, as well as other costs incurred to improve the company's resale platform technology and further expand the company's pipeline. Net loss was 4.7 million for the fourth quarter of 2021, and net loss per share was 19 cents on a weighted average basic and diluted share count of 24.9 million. Compared to 12.9 million, and a net loss per share of 60 cents on a weighted average basic and diluted share count of 21.4 million in the same period of the prior year. Cash was 110.7 million as of June 30, 2021. Moving on to guidance for our first fiscal quarter, we expect total commercial revenue in the first fiscal quarter to be approximately $7 million. With that, we thank you for your attention, and now I will turn the call back over to the operator for your questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Josh Jennings with Cowan. Your line is open.

Hi, Josh. Good afternoon. Hi. Good afternoon, Mike and Michael. Thanks for taking the questions, and it's great to see the recovery progress you guys made in the quarter, even stronger than the preannouncement. I wanted to ask about fiscal QQ guidance. or sorry, excuse me, fiscal 1Q guidance of $7 million in commercial revenues. That's a sequential improvement. It sounds like what you're seeing to date in August and July, you're not seeing disruption from Delta, but I was wondering if you could just help us understand what type of headwinds you are seeing in the burn space, and then particularly what the trends in August have been like.

Thanks for your question, Josh. We are seeing some softening in August. I'm actually, in addition to Michael and myself, I've got Aaron Liberto, our chief commercial officer, as well as Andrew Quick, our chief technology officer, with me here. So they'll also be available to answer questions. And for this one, I'd like to pass it over to Aaron to give you a little bit more color on the revenue growth. and our estimate of $7 million for commercial revenue in the first quarter.

Hi, Josh. How are you? So I think what we're seeing and what we've kind of anticipated is there's a certain degree of seasonality as you move towards the fall that we're starting to see in the August timeframe and that we're anticipating as we move into September. So I think that is separate from COVID. Related to the Delta variant, we're certainly seeing that more so in the south. We're seeing that kind of affect hospitals, the support staff. Not as much affecting sales yet. I mean, certain procedures are getting affected, but if anything, more so delayed than anything else. But again, I think that we'll have to just wait and see how that might pan out. But I think more so than anything, it's the seasonality that I think that we're anticipating more so.

Great. And maybe just one quick follow-up on this topic. In terms of the burn bed availability, those metrics you gave from 2020, those are some significant reductions in burn bed availability. But just to be clear, you're not seeing any reduction in burn bed availability so far with this Delta surge? Did I hear that correctly?

Yeah, that's correct. We're not yet seeing any effect on bed availability, and we're hoping that we don't going forward.

Great. One question on the pipeline, just on the bit logo trial design optimization. I was wondering if you could just help share or you could just share the signals, maybe from the feasibility trial or other data sets that have accrued, that drove decisions to optimize or eliminate the 1 to 5 and 1 to 10 expansion ratio arms and And did you need to show those signals or those data sets to the FDA to have them accept the trial design modification? And is your optimism that this is the right way to go from an efficiency standpoint and the commercial standpoint, getting that one to 20 expansion ratio indication under your bill?

So I'll start off with an answer to that question, Josh, and then pass it over to Andy. Definitely, we are solid in selecting the 1 to 20 expansion going forward in the single arm trial design with 23 patients. That's powered to 90%. And we're feeling very comfortable to talk about the data sets that underpin that decision. I will pass it over to Andy. Thanks, Mike. Hi, Josh.

We have not relied on the feasibility data with respect to our FDA submission, but in its early days in the feasibility program, in any case, to date, nothing in those data would appear counter to the decision that we have made, which is a strategic decision to sort of consolidate study power into a single arm. And there are kind of multiple data points feeding into that. Recent publications are showing results, strong results, at the 1 to 20 and higher expansions. And our own internal development work on the bench is showing that the fluid volumes associated with preparation of the 1 to 20 cell suspension are optimal for cell harvesting. And so it's really those data that we used in our FDA submission to consolidate to a single arm.

Excellent. Thanks for taking the questions. Thanks, Josh.

Thank you. Our next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open.

Great. Thanks so much for taking that question. I know there's some softening here in fiscal Q1 as a result of COVID. I get that. But what I'm really interested in is the sequential improvement you saw in fiscal Q4. And I know it's a you know, fourth quarter and a bigger push among the sales force. But that, by my numbers, is about a 40% sequential increase on a per surgeon basis versus fiscal Q3. So it seems like the strategy of going deeper in these existing accounts is really starting to get traction. So I'm just wondering, as we come out of COVID and some of the impacts you're seeing there, I mean, you know, the ability to drive, you know, deeper and deeper penetration seems like it's proving out. So how quickly can you get back to doing that? And then, you know, again, the revenue per doctor that I'm seeing right now out of fiscal Q4 is about $45,000 roughly. You know, where do you think that $45,000 can go over time?

Erin, do you want to take this one with Matt?

Yeah. So I think there was a few things that are happening last quarter that just to put in perspective. So first of all, You know, the pendulum somewhat swung, right, when people were in massive lockdown and all of a sudden people got their vaccinations and were able to go out and live again. And because of that, the accidents, the pendulum swung from because of lockdown, very little accidents, to all of a sudden the accidents and the incidents of burns really increased exponentially. So I would say that our sales was driven in two parts. One part was accidents. and abnormally high accidents, unlike I've ever seen an increase before. And that was due to this, you know, desire for people to get out and live again because they've been cooped up. Two, it was also driven by, you know, the sales team was ready and able to go. They were able to start meeting with accounts live. They were able to have live events that are much more impactful than virtual events. We started having off-site training events. We started having you know, just off-site engagement and, you know, live engagement, that's much more impactful. But you're right. So we deepened penetration, but there was just a lot more cases. Burns, actual incidence of burns was much higher. So it was those two things together. So I think the incidence of burns, the pendulum's coming back down. As I mentioned, kind of the seasonality or the incidence of burns is coming back down. We are seeing some tightening of restrictions due to Delta variant coming back into play as well. We are seeing kind of discussions of the fall burns meetings going back to virtual. We've got one more live meeting planned, but the rest of our live meetings that we had planned for the fall, we're putting on pause until we see what happens kind of with the Delta variant. You know, there's a few unknown variables that are going to play out here, but I think you're absolutely right. I mean, we were very successful moving the needle in terms of penetrating with accounts, but there was a lot more variables to play there. And so I think there's many more dynamics to kind of look at if that helps at all.

Okay. I guess maybe just to put it, it's very helpful, just to put a finer point on that, Erin. I mean, what I'm really curious about is when they're reaching for resale versus doing a traditional skin graft, I know there seems like the volume was strong here. Is there any way to kind of parse out volume versus just your market share taking where people are saying, you know what, I'm not going to do traditional grafting, I'm going to use resale instead?

Yeah, and that's the tough part about it, right? Because we, the NPR data that we get from the is for the year. We don't get that until a year later. We are starting to track skin grafting data, but we get that at a six month delay. Right? So what we're getting is just kind of ad hoc feedback from the sites on this kind of. increase in admissions. So I don't have hardcore data in terms of what those exact number of procedures are for the quarter and what our capture rate was in terms of exact resale eligible for you to show what you want is the market share capture of eligible procedures, right? And that data is challenging.

Okay. Okay. It certainly seems like it's going the right direction now. So Thanks for that. And then as the follow-up to my two-part first question, but, you know, on Josh's point on the single-arm vitiligo, I'm just wondering, you know, 19 patients, I know it's by year end. You said that before for the other study design. Going down to a single arm, though, can't you crunch the data faster? Isn't the cost of the trial going to be a little bit lower as a result of this? And then is there any risk? that it's not viewed as a more robust clinical study because it's not multi-armed in the eyes of clinicians once you do get the approval?

So let me again start out with a response here and then pass it over to Andy to add some color to it. But We've got 23 patients that will be enrolled in the pivotal trial. Each site needs to do a run-in patient, as Andy previously mentioned, basically as a practice patient to make sure that they've got the procedure down right. And we don't feel that we're losing anything by not studying the 1 to 5 and 1 to 10 patients. concentrations because it's not a linear basically rollout of availability of skin cells relative to diluent when we look at the suspension. And that's what Andy's talking about when he speaks about the laboratory results that his group has uncovered in the meantime. So there seems to be a greater efficiency as we're at a 1 to 20 with that fluid volume and in the cellular suspension. So we feel very confident also seeing publications coming out with 1 to 20, 1 to 40, and getting good results with those patients. And I'll pass it over to Andy now if you want to add any color.

I mean, you're correct. This trial design is more cost-effective for us. And, you know, just to put it in what Mike is saying, our data don't predict a difference between the 1 to 10, 1 to 5, and 1 to 20. So, you know, that was really what underpinned our decision.

Does that answer your question, Matt?

That's perfect.

Thanks so much.

Thank you. Our next question comes from the line of Lyann Harrison with Bank of America. Your line is open.

Hi, Mike. Hi, Michael. I'm going to come back to the top 20 accounts. Obviously, it's great to see you've got a broader base of accounts there with the top 20 now holding 40%. But if I think about, you know, rising cases in the United States, can you give us a sense of how many of those top 20 accounts might be in states where we're seeing a significant increase in the Delta variant cases?

Aaron, are you able to answer that?

Yeah, well, I would say that, gosh, a good chunk, I mean, many of our largest accounts are in the top 20. So, yeah, I mean, if I look at the numbers, oh gosh, almost half of them are in the top 20 or in the areas that are affected with the Delta in terms of actual proportionately the makeup of the total sales of the top 20 accounts, if that makes sense.

Okay. And with those accounts at the moment, as you say, with the Delta variant, are you seeing any material change in access to hospitals for those particular accounts?

So there are changes in access, but we're still able to get in, right? So for example, when I say that, there's no what we call plus one. You can't bring anybody with you. You are able to get in to support a case, to do a training, to be there for the aftercare. You are now, for some hospitals, required to be vaccinated. There are kind of more strict requirements to get in. but we are still able to get in. The other issue that is that many of the staff are out with COVID, many of the nurses are out with COVID, so we're actually required to be in more often to help support cases or to train. So if anything, we've seen some cases get delayed because of that, but we haven't, to my knowledge, actually lost a case because of that quite yet.

Okay, thank you. And if I could follow up. you know, with the approval for resale for pediatric thermal burns, can you give us an indication of what sort of traction you're getting with the pediatric hospitals today?

So, again, I'll start off and pass it over to Aaron. We are getting traction, and there is a specific pediatric campaign for pediatric-only facilities A good example is UC Davis, where they're, you know, one of the top accounts. And they've got their major hospital across the street. They've got Shriners Hospital for children only. And they signed on with us partially because of that expanded label with pediatrics. So that's just an example there. So we are getting additional traction. And I'll pass it on to Erin for any additional color.

Yeah, so there's not a lot of pediatric-only burns hospitals in the United States. And so those that are are the ones that we're now working with to try and get what we call VAC approval or hospital administration approval. And so many of those hospitals are in that process right now. Typically that process can take, you know, six months and sometimes longer to kind of get through that. So we haven't had, you know, we haven't had our approval for very long. So we're just kind of getting through that process for the most part with most of those accounts. But the label has certainly been very, very helpful getting approval and also now accessing those conversations and starting the process off in those pediatric-only accounts. And also, it's been helpful getting access into other accounts just to have new conversation because that also is another excuse to get into hospitals. It's considered a new product or new news, and it does allow us entry into the hospital to talk about the new data that we have and the new label.

Okay, great. Thank you very much.

You're welcome.

Thanks, Leah. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is open.

Hey, thanks for taking the questions. It's great to see all the progress. Just I'll ask my two questions up front and kind of follow up to Matt's question. For you, Aaron, you know, I know we're talking about all the utilization dynamics and things like that. what are you potentially displacing? Whether it's skin grafting or other products on some of these cases, I'd love to understand, you know, what you could be also, you know, replacing beyond skin grafting. And then the second question, and Mike, I know, you know, you don't want to prognosticate on pastor status, but, you know, if you read the comments from the FDA, you know, there was a discussion around whether resale itself is a device and how they're thinking about it. And so I'd love just your latest thoughts on, what you think or what your interactions with the agency or CMS has been around this and kind of where your head's at in terms of getting that pass-through label. Thanks for taking the questions.

Sure, Ryan. Why don't I let Aaron answer the first question about what are we displacing beyond skin grafts. I'll take the second one on our pass-through payment.

So just to be clear, our target is skin grafting. Skin grafting is the standard of care. Skin grafting is where the volume's at. The only other product, you know, EpiCell is the only other product in the market, and the volumes with EpiCell are so low. Their price point is very, very high. But when you actually look at what that equates to in terms of procedural volume, it is very, very low, and that's not meaningful for us in terms of volume. So that's not our target. Our target is skin grafts. And any time that you may require a skin graft, consider resell. And essentially, you know, TBSAs or total body surface areas of 5% and higher is pretty much our sweet spot any time you could require a skin graft. So it's really changing the standard of care. It's a total paradigm shift. That's what we're focusing on.

And I'll just follow up on the pass-through payment for our outpatients. And you are correct that CMS in the Federal Register said that we basically check all the boxes, but they're uncertain that we are or should be classified as a device. Of course, we do have a PMA approved, which is a device. We do have... device breakthrough designation. And the FDA has fully regulated us as a device. And there's also a change of staff that has gone on at CMS. And what I believe is that it's really a re-education program or process that we need to go through with the change of staff to get them up to speed and and have them really understand the details of what's been going on. And of course, during the open comment period, you know, CMS is not going to provide any additional commentary on it. But we remain confident that this will come through with that being their only Aaron, I don't know if the reimbursement group reports to you, but anything to add?

No, I think you've covered it. I mean, hopefully we'll – typically they will publish the final rule in November. Last year it was a little bit later in December, but hopefully we'll know by year end. I think we're, you know, more optimistic still. I think we were surprised on that feedback, you know, given everything that you said, but we'll have to wait and see.

Okay. Appreciate the caller. Thank you, guys. Congrats on all the progress this quarter. Thank you, Ryan.

Thank you. Our next question comes from the line of John Hester with Bill Potter. Your line is open.

Good afternoon, everyone. Thank you for your time today. Michael, if you could just expand on your comments about the Japan market. It's looming fairly close now, actually. You said late 21 for an expected approval there, so presumably with a launch in calendar year 22. Can you just run through the key points on your commercial arrangements there with Cosmotech, please?

Sure.

And maybe some volume comments.

Sure. Why don't I start off and then I may pass it to Michael Holder for some additional color commentary if he has any. But our arrangement with Cosmotech, our partner in Japan, is that it's approximately a 50% revenue share. And, you know, you've heard of the progress. There's a GCP audit that has begun, no findings to date. There's also some planned discussions with the Ministry of Health, Labor, and Welfare on reimbursement, which are all very positive commentaries. relative to the approval coming up at calendar year end, which we've not changed our guidance on. And we still do anticipate that. And we do anticipate a launch in 2022. And so far as the volumes and how much we'll sell or Cosmotech will sell rather, it's hard to say until we actually get the label from PMDA. because COSMATEC with us in collaboration, we have applied for a very broad label to include burns, and we're confident of getting the indication of burns. But it also includes soft tissue. It also includes vitiligo. It also includes potentially chronics. So dependent upon what indications are actually approved by the PMDA, and given reimbursement by the MHLW, that will determine the volumes and then the revenue that's going to be coming to us. Does that answer your question, John?

Thank you, Mike. Just as a follow-up, Mike, what do you believe is the –

market in japan for vitiligo in terms of how many stable patients if there's 1.3 million in the u.s how many yeah any idea what that could be in japan generally it's uh 10 percent is is uh you know rule of thumb uh but let me pass it over to aaron uh to give you um more detail that you may have yeah so um china and japan have a little bit you know are um

China, Japan, and the U.S. are kind of the highest nations for vitiligo. There's about 2 million patients that suffer from vitiligo, so if you use the same proportions that we have in the U.S. for stable, that's just over half a million that have stable vitiligo.

Okay. And Mike, just finally, you also talked about other geographic expansions. Is there anything happening beyond Japan at this point?

At this point, no. We're really waiting for additional indication approvals. And to be more specific, once we've got soft tissue and vitiligo approved in the United States, then we will have the necessary ROI that we need to go into each country in Europe, get a sales force going, negotiate reimbursement, do our economic models and, you know, really get into Europe as well as back into Australia. Excellent. Thank you. Pleasure, John.

Thank you. I'm not showing any further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.