Avita Medical, Inc.

Good day and thank you for standing by. Welcome to the Aveda Medical fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Caroline Corder. Please go ahead.

Thank you, Operator.

Welcome to Avita Medical's fourth quarter 2022 earnings call. 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. 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 Evita Medical operates, trends, demand, and expectations for its products and technology, its expected financial performance, expenses, and position in the markets. 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 Avita Medical's most recent filings with the SEC, particularly the risks described in Avita Medical's annual report on Form 10-K for the year ended December 31, 2022, 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. Aveda Medical undertakes no obligation to update these statements except as required by applicable law. Aveda Medical's press release with fourth quarter 2022 results is available on its website, www.avedamedical.com, under the investor section, and includes additional details about its financial results. Aveda Medical's website also has the latest SEC filings, which you are encouraged to review. The recording of today's call will be available on Aveda Medical's website by 5 p.m. Pacific time today. Joining me on today's call are Jim Corbett, Chief Executive Officer, and Sean Deakins, Acting Chief Financial Officer. I'll now turn the call over to Jim for his comments.

Thank you, Caroline. Good afternoon, everyone, and thank you for joining us today. I will begin today's call by discussing highlights for the fourth quarter and full year, as well as our expectations and guidance for 2023. Sean will then provide more detailed commentary on our financial performance before opening the call to Q&A. To begin with, we had a strong top line commercial revenue performance with $9.4 million in Q4 2022, which is a 37% increase over the same period in the prior year. For the full year 2022, our commercial revenue was $34.1 million which was a 36% increase over the prior year. As a reminder, commercial revenue includes all global revenue and excludes the $100,000 BARDA revenue recognized in the quarter and $400,000 for the year. I'd like to personally congratulate our field sales team for their successful 2022. I'd like to provide an update on the initial priorities I discuss on our third quarter call. With respect to our two pending applications with the FDA, our PMA supplement for soft tissue was submitted on the 9th of December, and our PMA application for vitiligo was submitted on the 16th. Both submissions independently have breakthrough device designation. As such, we have expedited review for both programs, which have each met or exceeded the primary endpoints in their respective studies used to support the applications. The 180-day review cycle would imply June approvals. Notably, the soft tissue PMA supplement would significantly broaden our existing burns market and allow us to leverage our existing burns infrastructure. Our team has developed the commercial plans to maximize the soft tissue opportunity and to drive synergies between burns and soft tissue repair, which will drive our growth over the next three-plus years. These synergies are significant and important. First, soft tissue repair utilizes the same inpatient reimbursement and outpatient codes as burns. As such, both in-hospital reimbursement through a DRG and outpatient reimbursement through a transitional pass-through code will be effective immediately upon FDA approval for soft tissue indications. Second, of the nearly 150 burn centers that we are presently approved to sell in, approximately half are also either level one or level two trauma centers, which means that these hospitals will have immediate access to the expanded label upon approval. Additionally, we will be adding approximately 1,000 hospital call points that are level one and level two trauma centers to our current 150 or so hospital call points. Third, within the US inpatient burn market, we're configured to only call on the U.S. burn centers where 70% of the resale eligible cases are treated. The expansion into level one and level two trauma centers positions our sales force to capture the remaining 30% of the burn market. In the second quarter, we will begin calling on these trauma centers. We will use this opportunity to begin promoting resale for burns in these level one and level two trauma centers and begin seeking value analysis committee approval that will allow for a more rapid soft tissue repair launch in July. Together, these synergies offer us the unique opportunity to prepare for the full commercial launch of soft tissue on July 1, 2023, as we should have immediate access to our expanded indications and VAC approvals in many of these hospitals already upon PMA supplement approval. Further, during the second quarter, we will initiate the planned expansion of our US field sales organization. Currently, we have 30 field salespeople that we will be expanding to approximately 70 field salespeople, which includes both direct sales and clinical roles. This is ahead of the expected June approval of our PMA supplement for soft tissue repair, such that the team is in place and trained at launch. This will result in a peak operating expense as a percent of revenue in Q3 2023. I emphasize that our contribution margin on new field sales professional is breakeven with approximately five resale kits sold per month per individual. Currently, the average productivity of a direct sales rep exceeds 20 kits per month. This is what I like to call weaponizing our gross profit to enhance market adoption penetration, where the sales force expansion pays for itself quickly. For the vitiligo indication, we expect PMA approval in June 2023 as well. We are in process of pursuing in-office reimbursement through the AMH CPT code process. It is our goal to secure Medicare reimbursement by January 2025. During the interim period, we will be implementing cash pay for vitiligo patients and physician-sponsored studies to build our podium present for an intended commercial launch in January 2025. During our last call, I also committed to providing an update on our automation program. By way of background, currently the disaggregation of cells from the autologous sample is done manually and requires frequent training by our field sales team. Our automation device is designed to automate that disaggregation, which will require less training by our sales team and operating room staff and will allow us to better leverage selling time by our field organization. We plan to submit our PMA supplement application to the FDA by June 30 of this year. Just like with soft tissue, we will be subject to the 180-day review cycle, and we project approval by January 2024. As reported in Q4, we have begun our launch in Japan through our partner, Cosmotech. Early returns are very positive. These sales are recognized in US dollars, and we will report Japan revenues In our footnotes in the foreign revenue line, during 2023, we expect that Japan will account for over 90% of those international revenues. With respect to our broader international strategy, it remains on our agenda to communicate our strategy during the November Q3 earnings call. With respect to 2023 guidance, as communicated, we will be providing updated annual and quarterly guidance every quarter. our annual revenue guidance for 2023 is expected to be in the range of $49 million to $51 million, which would be at midpoint of guidance, 47% growth over 2022. For the first quarter of 2023, we expect commercial revenues to be between $10 million and $11 million at the midpoint of this guidance, we would be up over 40% over the prior year. As I have outlined, 2023 will be the year of inflection for Aveda Medical, transforming our business to encompass multiple indications and dramatically expanding our growth trajectory. Our regulatory and commercial teams are making great strides, and I look forward to updating you on our progress on future calls. With that, I'd like to turn it over to Sean Eakins, Acting Chief Financial Officer.

Thank you, Jim. In the three months ended December 31st, 2022, our commercial revenue, which excludes barter revenue, increased by 37% to 9.4 million compared to 6.8 million in the same period in 2021. Total revenue, which includes barter revenue, increased by 36% to 9.5 million compared to 6.9 million in the same period in 2021. Gross profit margin was 86% compared to 88% for the fourth quarter of 2021. Total operating expenses for the quarter increased by 2% to $15 million, compared to $14.8 million in the same period in 2021. The increase in operating expenses is attributable to increased selling expenses, pre-commercialization costs, and salaries and benefits, partially offset by lower research and development and share-based compensation expenses. Higher selling costs are trivial to increase commissions, travel costs, and training events associated with increased sales activity. Increased pre-commercialization costs are driven by activities related to future resale launches in soft tissue repair and vitiligo. Higher salaries and benefits are driven by the expansion of our workforce to support the overall operation. Research and development costs were lower due to the following. The pediatric burn study was closed for enrollment. soft tissue repair and vitiligo trial participants were in less costly follow-up phases this period compared to more costly recruitment and treatment phases in the prior period, along with lower expenses for sponsored research agreements toward pipeline development. In addition, we had lower development expenses in the current year from ongoing development of next-generation devices for automated preparation of spray-on skin cells, as we are currently in a lower-cost project phase compared to the prior year. Care-based compensation expenses were lower due to reversal in the current period of a previously recognized expense for unvested awards related to the termination of a former executive officer. Net loss decreased by 37% to 5.4 million or 21 cents per share compared to a net loss of 8.5 million or 34 cents per share in the same period in 2021. Adjusted EBITDA loss decreased by 39% to 4 million compared to a loss of $6.5 million in the same period in 2021. For the full year ended December 31st, 2022, our commercial revenue increased by 36% to $34.1 million, compared to $25.1 million in the same period in 2021. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the commencement of commercial sales with our partner Cosmotech in Japan. Total revenue increased by 4% to $34.4 million compared to $33 million in the same period in 2021. Gross profit margin was 82%, relatively flat compared to the same period in 2021. Total operating expenses increased by 10% to $59.1 million compared to $53.6 million in the same period in 2021. The increase in operating expenses is attributable to higher salaries and benefits, pre-commercialization costs, selling costs, share-based compensation expenses, partially offset by lower research and development expenses. Higher salaries and benefits were primarily a result of the expansion of our commercial team, along with an increase in our workforce to support the overall operations. In addition, we encourage severance costs in the current year associated with the termination of a former executive officer. Higher pre-commercialization costs are driven by activities related to future resale launches in soft tissue repair and vitiligo. Higher selling costs are trivial to increased commissions, travel costs, and training events due to increased sales activity. Share-based compensation expenses were higher in the current year driven by new equity grants, partially offset by a reversal of a previously recognized expense from vested awards related to termination of a former executive officer. Research and development costs were lower due to the following. The pediatric burn study was closed for enrollment, soft tissue repair and vitiligo trial participants were in less costly follow-up phases in this period compared to more costly recruitment and treatment phases in the prior period, and a lower expense for sponsored research towards pipeline development in the current period. This is partially offset by higher development expenses in the current year from ongoing development of next-generation devices for an automated preparation of spray on skin cells. as compared to the prior year due to early prototype development and testing. Net loss was $26.7 million, or $1.07 per share, compared to a net loss of $25.1 million, or $1.03 per share, in the same period in 2021. Adjusted EBITDA loss was $19 million, compared to a loss of $18.1 million in the same period in 2021. A table reconciling non-GAAP measures is included in today's press release for reference. With that, we thank you for your time, and now I'll turn the call back to the operator for your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joshua Jennings of Cowan. Your line is now open.

Thank you. Good afternoon. Congrats on the strong finish to confidence in the outlook and the call for reflection in 2023, Jim and Sean. One was hoping to ask about guidance, full year and first quarter to start. If there's any way you can maybe help us think through your outlook for the core burn business, resale burn business, and the growth you anticipate, and then maybe any assumptions for soft tissue contributions for the full year. And then for the first quarter, just it's a nice sequential step up, if you can just remind us about seasonality trends in the burn market in the United States. Is there some seasonality tailwinds, or is this just momentum from Q4 carrying into these first two months of 23 already and giving the compensative tissue that nice sequential step up in Q1? And I wouldn't follow it.

Thanks, Josh. That was a very succinct single question. Let me take it on. I'm just teasing. So first of all, with regard to the burn business, let's start with that. We saw sequential growth Q4 to Q1, clearly. And that does not reflect seasonality. I'll just give you some data. If you look at claims data for the last three years by quarter contribution to the year and you average them, the average burn admits that are resale eligible sound like this, 25, 25, 26, 24. So the very minor changes between Q4 and Q3, and it's one point in terms of annual admins. So there's really not a seasonality reality that we can define from the claims data. So what we're therefore seeing is growth and penetration. So that's the first element, I think, to your question. What we expect to see through the course of the year, Q1 and Q2, is continued adoption and, you know, the number of users who use it multiple times per month increasing. As our evidence continues to grow, the experience with burn surgeons continues to get validated in terms of tissue sparing and healing and early exit from the hospital. So that's really taking its course, and our field sales team has done a really terrific job What happens as we move, and I'm staying on burns for a second, into the second half, depending on your math, 30% of the burns market, which is about 10,000 of the 35,000 admits, are in soft tissue repair. And they are in, excuse me, a third of them are in level one and two trauma centers, okay? That 10,000 cases, we have not been configured to call on. So one of our expectations as we move through the year is that adoption will come our way because, of course, our sales team will be calling on those physicians with the very strong accumulated evidence and commercial experience we've had focusing only on burn centers. So that's a really big driver for the year in the burns market. We're feeling increasingly comfortable with our soft tissue repair PMA supplement in terms of timing. We're having a very productive interaction with the FDA. We're not getting surprises of any type. And we, as you know, are on the breakthrough device designation path. And that is, of course, giving us expedited review. And we don't stop the clock unless there's a material deficiency. has caused us to bet, so to speak, on that June approval and July 1 readiness. So with that readiness during Q2, we're expanding, as I mentioned, our field force from approximately 30 to 70. So during the second half, we'll build increasing momentum in soft tissue repair. It will have a curve associated with it. For example, we will have soft tissue repair indication available and VAC approved in virtually half of the burn centers, which are level one and level two qualified. We'll also begin the VAC process during Q2 in a number of level one and two trauma centers using burns as our indication for that process. It's a bit uncertain at the moment exactly how many will get through VAC during Q2, but certainly we'll have a running start And our sales team will be fully in place and trained for that July 1 launch. So we'll scale up during the second half in soft tissue. And, of course, what will really be exciting, quite honestly, is our exit rate in Q4 because it's going to really position us for high growth in 2024.

Thanks for walking us through that. I appreciate it. And just the follow-up on the build-out of the sales team just was fantastic. hoping to better understand where you're recruiting these reps from, and are there any challenges to getting to that 70 number in Q2, or do you feel like that's a pretty straight shot based on experience to date? Thanks again for taking the questions.

Thanks, Josh. It is a qualitative evaluation on my part, but I don't mind sharing with it. First of all, we have a very strong pipeline of candidates. I think the success that Aveda has been experiencing in the marketplace translates well. The expanding indications that we have and that are coming translates well in terms of recruiting. The fact that we are well capitalized and have the capital to execute a growth strategy is very appreciated because a lot of companies don't have that. So our early returns are that we've largely filled the management roles that we're expanding into or have identified them. We've begun interviewing salespeople. We have a great pipeline of really high-quality candidates. They're coming from a number of places, but they come from related wound care companies. They come from med-surg type backgrounds, so we want salespeople who are experienced and comfortable in the OR And we're finding really a strong pipeline of candidates. So we're quite confident that we're going to get our team in place and have adequate time to train them. It is a big scale-up for us, and our commercial team is really stepping into this one. So it's really kind of inspiring to watch them do it.

Excellent. Great to hear.

Okay, thank you. Please stand by for our next question.

Our next question comes from the line of Philip Dantwine of Piper. Your line is now open.

Hey, this is Phil on for Matt. Thanks for taking our questions and congrats on the excellent quarter. I guess just for starters, you know, and given the, you know, expected inflection here in 2023 and your commentary, How durable do you see this, call it 45% growth in the 24-25 timeframe? And is it wrong to say that you're exiting 2023 at nearly 50% growth? Thanks. Yes, thanks, Philip.

First, at midpoint, it's 47%, not 45%, just to make a fine point of it. I think that implies a greater than 50% exit rate in Q4. You're correct. So how durable do I think it is? I think it's quite durable. The exit rate will cause us to have to expand more into 2024 as well in terms of our commercial coverage. So I think we have some very strong growth years ahead of us with soft tissue and burns on their own, not adding to either an international expansion or a launch of the vitiligo in January 25.

That's really helpful. And I guess one more for me. On spend, given the rapid increase in the sales force here in Q2, what's cash burn expected to look like? And how do you think about capitalization moving forward? I appreciate the commentary that OpEx should peak in Q3, but what should we be thinking about there?

Well, clearly we're making an investment in market growth. Now, go back to our 83% gross profit and how we look at each of those investments. Contribution margin for a sales rep gets covered by five resale sales a month. So for us, that is from looking at our burns experience, Each rep averages well over 20 per month. So we do have an expectation about when they cross over. And it is, without getting precise about it, because it does have variability, it's a number of months, not a year, that they will cross over. So I think from a cash burn point of view, we feel quite comfortable, for example, absent investments in vitiligo or international, we expect to end 24 with in excess of 30 million of cash. So that will be after another expansion and another growth year. So we feel very comfortable with our capital position as it is today.

Awesome. Thank you so much. You bet. Thank you.

Thank you.

Please stand by for our next question. Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

Hi, this is Sav on for Ryan, and thank you for taking my questions. This next one's on the Japanese market and the partnership with Cosmotech. Do you expect meaningful contributions from the Japanese market in 2023, and how should we think about that, given the guidance you provided? Then I have a follow-up as well. Thank you.

Well, first of all, our early returns in Japan are going well. We've performed in the territory of an excess of hundreds of patients so far. That said, we do not have enough experience with them that we're giving specific guidance on Japan, although you'll note that it is even at a couple hundred in the short time it's been, we do expect a strong performance from Japan. remembering that we recognize 40% of the selling price. So on one hand, it's a very high gross profit, high operating profit type sale. It's also lower per case in revenue, but lower expense to produce. So I think in the coming quarter, my objective in my conversations with Cosmotech is to be in a place where we can project forward our expectations for Japan. We're just not quite ready to express that in this moment.

Thank you. That's very helpful. This next one's on Vitiligo. You indicated that Vitiligo is likely to still be approved in June of 2023 with insurance reimbursement established in January of 2025. Can you provide us any updates on conversations you've had with insurance payers as you look to establish reimbursement for Vitiligo? Thank you again.

Yes, you bet. Actually, we've had no formal conversations with payers at this time. They, of course, dedicate their time to products that are ready for market, and we are still a few months away from that. Our expectation is, of course, that what we're looking for is to establish resell as an in-office treatment alternative. So, that is a process that is embedded in sort of the reimbursement world. So, it's kind of a complex question to answer. We haven't gone to private insurers yet. We'll, in fact, go to CMS first. So, that'll happen, you know, post, later this year.

Thank you.

Okay. Thank you. Please stand by for our next question.

Our next question comes from the line of Brooks O'Neill of Lake Street Capital Markets. Your line is now open.

Well, thank you. Good afternoon, everyone. I was hoping you might talk a little bit about what your expectations are with regard to sort of the dynamics in the soft tissue market relative to your experience with large burns in terms of, you know, kind of number of cases, that resale might be appropriate for, let's say, per week or per month in the centers you're going to attack and how many kits per case. Some of those things would help us to get a good feel for sort of how you view the opportunity in soft tissue.

Yes. Thanks, Brooks. Let me try and work through that thought because there's a number of questions I think you raised. So first and foremost, in soft tissue repair and reconstruction, which we label, we believe, the cases themselves will utilize less resell kits per patient. So in large burns, it's common for one or more kits to be used on a patient, where in the soft tissue market, that will happen quite less often. So that's, I think, the first part of your question. The second is the number of patients to be treated. It's in the order of 4X available resell viable candidates relative to burns. So that is a really substantial increase, and there's a lot of different applications that we will have access to with this broader indication. So in a level one trauma center, for example, there's a wide range of things that might patients that might present themselves. For example, there will be burns patients who present. That will happen. They won't be the large, greater than 30% TBSA burns, but they'll be smaller burns that nonetheless need treatment. We'll see necrotizing bacteria. We'll see degloving. We'll see abrasions. We'll see acute wounds. So there's so many applications, which is, on one hand, a great market opportunity. It requires, on the other hand, extensive training and focus on a part of our sales team so we really will be moving from the big accounts to the small and the reason of course is when you camp out in the big accounts you get access to all those indications and we allow our FDA submission for automation that so to speak cook at FDA so that by the time we're moving to smaller smaller level one and two trauma centers in January 24 we expect to have our automation program launched and ready to go and improved so that it's a there's going to be a constant evolution and our both ability to get back approvals all the way to these broader indications to starting to move into smaller level one and two trauma centers and and everything benefiting from the absolute adrenaline injection of automation. So automation will make our sales team so much more productive.

Great. That's really helpful. So let me just ask one more. I'm very intrigued by the comments you made about getting to break even with five kids per, I think you said month, but I might have that wrong. And, you know, the average being 20 kits. Do you envision the dynamics in small soft tissue being the same in terms of an average salesman being able to sell 20 kits? Or do you think they might be able to sell a lot more? And kind of what's your expectation for how quickly people will get up to be average or better?

Okay, perfect. So for clarification, the metric I used was contribution margin for the cost of a rep is equivalent approximately to five resale kits. And that our current sales reps in burns only are averaging in excess of 20. So just as baseline, that's where we are. So first question is, do we expect that five to be the same for our expanded sales organization? The answer is yes. It's the same. We'll be selling virtually the same kit that is sold at the same price. So therefore, we manufacture it for the same. So the 83% gross profit works still in that equation. Do we think that the market opportunity to be greater than 20 per month exists? Actually, very much so. We expect that the potential is quite higher than that because, of course, the market cases of patients that we are treating are approximately 4x times the number that are in burns. So we think that opportunity is really rich. Now we have to execute, but that's a big opportunity for us. I think I got all your questions, or did I miss one?

No, you did, Jim. Thanks a lot. And it's a pretty exciting opportunity, and I can't wait to see it unfold.

Thanks, Brooks. Me too.

As a reminder, to ask a question, you will need to press star 11 on your telephone. Our next question comes from the line of Leanne Harrison of Bank of America. Your line is now open.

Hi. Good afternoon, all. Just to follow up on Brooks' question, I have one more on that. In terms of the ramp-up rate it takes for a salesperson to get from, you know, zero to five kits a month and then from five kits a month to 20 kits a month, what does that profile look like for the purposes of us looking at what the ramp-up might be for soft tissue?

You know, Leanne, it's a really terrific question. We do have data on that. It's fairly variable. But on the front end of it, it is less than a half a year. And on the longer end, it is well under a year. So it's variable. But we know it's months. We know it's not years. So they pass that five pretty consistently in a short number of months. And then it takes more work. In fact, when we were launching with Burns, it was actually harder. We were less proven at that time. And the market was narrower in terms of the indication we were pursuing. So we actually are very optimistic about the equation that you're describing. I'd like to give you a more precise answer, but I can suffice to say it's months, not a year. And I think that's probably as tight as I can make that interval at the moment.

That's very helpful. And then just to follow up, a question of gross margin. So obviously seeing gross margin slightly down this quarter, but over time it's expanded significantly as volume increased. Do you have an expectation on target gross margin or where you might end up at the end of financial 23?

Yes, actually, our gross margin has some variability to it. We don't experience price competition, but we have volume-related discounts that come into play, particularly as you move through the end of the year. So that's one factor. We've recently made some improvements of note in our manufacturing process. Very specifically, kind of in the geek category, if you don't mind, but we had this process where we had to ship what's called cold chain in a package that controlled temperature. And in the last few months, we succeeded in establishing the data that made that cold chain shipping not necessary and removed rather substantial cost that we will see going forward. So I think we feel very confident about two things, our cost of goods improving and the stability of our average selling price where it is mostly subject to volume discount versus price competition.

Thank you very much. That's all I had.

Thank you. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.