Execution is key in business. But it's relative to expectations.

AVITA Medical is growing annual revenue at a respectable 30% clip at an enviable gross margin exceeding 80%. If it had a multi-year cash runway and sensible growth strategy, then it could be a great long-term investment. It has all the potential to be a future compounder – one of my favorite investing archetypes.

That potential, much like AVITA Medical's survival, is in doubt.

The business' performance isn't the problem. The problem is a lack of execution against unrealistic expectations set by the management team, which is running the business as if it's growing twice as fast with a healthy cash cushion and positive cash flow on the horizon. None of those reflect reality though.

The wound care specialist reported quarterly revenue of just $18.5 million, virtually unchanged from the prior quarter ($18.4 million) or the period before that ($19.5 million). A stop-and-go ramp is frustrating, but not unexpected, especially given all the product launches recently. But there aren't many signs the business is gaining traction. International sales, heralded as the next growth driver in November 2023, still aren't picking up. New product launches aren't contributing much either. Non-ReCell products represent just 3% of the revenue mix.

It reported operating cash burn of $10 million in the first quarter and ended March 2025 with only $25 million in cash. A few months ago it voluntarily terminated a credit agreement with OrbiMed that would've given it access to another $50 million in funding.

If the business could get its shit together – realistic expectations, a multi-year cash runway, and monetizing the stable vitiligo indication – then it could once again earn a spot in my portfolio. But what comes next could get ugly.

By the Numbers

To reiterate, AVITA Medical is a strong business. It's growing and has healthy margins. It just needs a little more time to scale to breakeven operations – and iron out some growing pains along the way.

Therein lies the problem. The business is burning too much cash relative to its funding runway. My current model expects the business to run out of cash in October 2025. Management will likely move to address that, but it should've taken action about 12-24 months ago. Investors are now exposed to the fallout risks of having waited too long – dilution, debt, or piecemeal funding arrangements while management stubbornly thinks epic growth is on the horizon.

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When investing in or analyzing money-losing businesses in the process of scaling, the most important metric to watch is operating income. Although operating cash flow usually turns positive before a business flips to profitability, there should be an easily-identifiable trend in improving operating income, too. This has characterized some of the best investments I've made (Enphase Energy, Repligen, Exact Sciences) and missed (TransMedics, Shockwave Medical). It's also highly predictive in determining which trendy stocks may be sending false signals. It's one of the best signals for making objective decisions about when to exit a position.

Unfortunately, AVITA Medical no longer earns the benefit of the doubt.

Operating income began to deteriorate when the new CEO Jim Corbett took over, but I decided to give the business more time to prove itself. The immediate surge in revenue growth after Corbett took the reins should've led to improving operating income over time given the strong gross margins. I do expect operating income and operating cash flow to have bottomed in Q1 2025 (relative to the rest of the year anyway), but it will take multiple quarters for me to regain confidence that any improving trend is durable.

The company has now missed its own revenue guidance in three of the last five quarters (!!).

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Investors might have had some wiggle room to extend the benefit of the doubt if other wound care products or international expansion were gaining traction. They are not. It's actually worrisome at this point.

Surprisingly, the transition from the prior-generation ease-of-use (EOU) ReCell device to the third-generation ReCell GO device stalled in Q1 2025. That's quite unexpected considering the device has now been available for nearly four full quarters. AVITA Medical generate more revenue from the prior-generation device in the first quarter compared to the fourth quarter, at $8.2 million compared to $7.9 million, respectively, and less revenue from ReCell GO in the same span. Management offered no explanation on the quarterly conference call, and no analysts asked about it.

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Similarly, the expansion into international markets is providing almost no benefit. In fact, the costs associated with international agreements and the lack of traction provided may mean these are dragging down the business. AVITA Medical generated 4% of revenue outside the United States in Q1 2025 despite promising growth since November 2023.

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AVITA Medical is not executing well. At the same time, there's evidence burns procedural volumes were sharply lower than the historical trend in the first quarter – and have quickly rebounded in the second quarter.

Larger peer Vericel generates roughly $45 million per quarter from its knee cartilage replacement product MACI, but it also generates roughly $9 million in quarterly revenue from burn products. It, too, delivered much less-than-expected revenue from burns treatments in Q1 2025.

Epicel and NexoBrid combined for 44% less revenue compared to the year-ago period. While the year-ago period was better than expected (making the comparison appear worse), its first quarter performance was still very weak. Vericel disclosed that Epicel procedural volumes in the first five weeks of Q2 2025 had already exceeded the Q1 2025 total. That suggests AVITA Medical will see a rebound in the current period, too.

Of course, Vericel also proves the importance of diversifying revenue sources. MACI has become the dominant driver of the business, margins, and profitability. That makes the decision by AVITA Medical to discontinue all commercialization efforts for ReCell in stable vitiligo a questionable move from a long-term strategic perspective, albeit one now required due to mismanagement of the cash runway.

Modeling Insights

The CEO also shared how the commercial organization had been restructured to enable more sustainable revenue growth. Sales reps will no longer be present during procedures (common practice in emergency settings) and will instead focus more on nurturing relationships. I don't doubt the logic, but the business retooled its approach and focus for the sales team in late 2023, too. That doesn't seem to have worked as promised.

AVITA Medical has lost the benefit of the doubt. Even if Q2 2025 performance is great or above expectations, how could investors be confident the business won't stumble again in Q3 2025? Management needs to prove it can deliver. Unfortunately, it also needs to prove its not driving the business off a cliff at 60 mph without hitting the brakes.

My model has been refined to expect significantly lower revenue growth in 2025, with all the accompanying negative impacts further down the income statement and cash flow statement. Operating income and operating cash burn are each expected to be worse than previously expected. At the current trajectory, AVITA Medical is expected to run out of cash sometime in October 2025. It is no longer expected to reach positive operating cash flow in the current calendar year – and maybe not until late 2026.

The current model for 2025 operations now expects:

• Full-year 2025 revenue of $78.514 million, down from a prior model of $110 million. This represents year-over-year growth of 22% – respectable, but the lowest since ReCell was commercialized. Company guidance expects $103 million at the midpoint.
• Full-year 2025 operating loss of $44.227 million, down from a prior model of $18.6 million. Fourth-quarter 2025 operating loss is now expected to be $9.98 million, down from a prior model of a operating income of $1.5 million.
• Full-year 2025 operating cash outflow of $41.1 million, down from a prior model of $15.4 million in outflows. This is now sharply higher than the available cash balance.

There are two other changes to the 2025 model. First, the number of shares outstanding has increased significantly. Second, the valuation multiple on revenue generated has decreased significantly. These amplify the negative changes in modeled revenue, cash flow, and operating income.

• Because of the mismanagement of the cash runway, the number of shares outstanding in the model has increased significantly due to expected existential balance sheet moves. The model now assumes AVITA Medical has 35.158 million shares outstanding (dilution of 33%), up from a prior model of 30.311 million (15% dilution). The company currently has 26.435 million shares outstanding.

Margin of Safety & Allocation

AVITA Medical is considered a Growth (Speculative) position. The estimated fair valuation based on my current model is below:

• Market close May 15: $6.37 per share
• Modeled Fair Valuation: $6.48 per share
• Allocation Range: Up to 5%

AVITA Medical reported 26.435 million shares outstanding as of May 5, 2025. The modeled fair valuation above assumes 35.158 million shares outstanding, which is equivalent to 33% dilution.

Further Reading

• May 2025 Finch Trades research note describing my exit from the positon. I now own 0 shares of the business.
• May 2025 press release announcing Q1 2025 operating results
• May 2025 regulatory filing (10-Q) detailing Q1 2025 operating results
• February 2025 research note analyzing what was needed in 2025 to meet revenue guidance and the prior model