AVITA Medical has always had excellent execution, but it struggled with communication. Now it excels at both.

Since taking over as CEO in September 2022 Jim Corbett has streamlined the management team, reinvigorated the sales team, and properly set expectations for investors. Mr. Corbett told investors the company would issue full-year 2023 revenue guidance on the February 2023 earnings conference call, and although he didn't reveal details at the time he did tease that "30% annual revenue growth" should be considered inadequate.

Boy was he right.

If the company executes on the new leader's strategy and vision, then the business should eclipse $100 million in annual revenue in 2025. It could be worth over $1 billion at that time.

By The Numbers

AVITA Medical significantly outperformed its initial full-year 2022 revenue guidance.

• This time last year the company expected to generate full-year 2022 revenue of $30 million, or year-over-year growth of 19%.
• Guidance was updated in the third quarter of 2022 (under the new CEO) to a range of $33 million to $34 million.

The business ended up generating commercial revenue of $34.1 million during the most recent calendar year, representing growth of 35% over the prior period. That strong performance helped to offset the winding down of the BARDA procurement contract for the strategic national stockpile.

Impressively, AVITA Medical managed to increase gross margin to 82.4% for the year (a record) and 85.8% during the fourth quarter (the second-highest total ever). Gross margin was expected to dip in 2022, but the CEO explained that a slight manufacturing tweak helped to boost margins.

The company had previously shipped all products in cold storage containers to satisfy regulatory expectations established when qualifying the product years ago. Engineers gathered data for product viability and stability when shipping ReCell kits with and without cold storage containers – and proved both methods are equivalent. That allowed the company to ditch the cold chain altogether, which removes a relatively large expense and boosts margins.

Gross margins are expected to decline as the company pushes into outpatient treatment centers and launches the soft tissue repair indication in July, primarily due to lower average selling prices and larger volume discounts, but there's now more room to make up for that shift. This is just the latest display of operational execution.

Data Source: Press Release.

Slightly higher gross margin wasn't enough to overcome an increase in operating expenses, but the full-year total was still better than our model.

• Solt DB Invest expected revenue of $33.8 million, a gross margin of 81.2%, operating expenses of $61 million, and an operating loss of $33.5 million for the year.
• The business achieved higher revenue and gross margin, and lower operating expenses and operating loss. I'm happy for my model to be wrong in that direction and err on the side of conservatism!

AVITA Medical ended 2022 with $79.3 million in cash. Despite plans to more than double the sales team from 30 to 70 field reps, the company expects to end 2024 (not 2023) with more than $30 million in cash.

Management explained that the contribution margin for a sales rep hits breakeven at five ReCell kits sold per month. To date, the average sales rep achieves over 20 ReCell kits sold per month. That suggests the company's quarterly cash burn may only reach $5 million for the next two years, although additional investments in growth would likely increase that number.

Our modeling disagrees with the cash balance projection (explained below). Either way, the business has optionality with how tenacious and aggressive it wants to be.

Full-Year 2023 Guidance

AVITA Medical issued both quarterly and annual guidance:

• First-quarter 2023 commercial revenue is expected in the range of $10 million to $11 million ($10.5 million midpoint). That would represent year-over-year growth of 41%.
• Full-year 2023 commercial revenue is expected in the range of $49 million to $51 million ($50 million midpoint). That would represent year-over-year growth of 47%.

For reference, the consensus estimate for full-year 2023 revenue on Wall Street was $39.6 million.

Solt DB Invest's prior models expected full-year 2023 revenue of $50.9 million and full-year 2024 revenue of $76.35 million. Both have been updated (see the section below).

Investors should be careful not to put their expectations on autopilot. CEO Jim Corbett is making a calculated, yet aggressive, push for growth. It's not aggressive in the sense that he's chasing a growth-at-all-costs business model. Quite the opposite in fact, as growth is being intelligently balanced against margin improvements and contribution margin forecasts for the sales team.

It is aggressive in the sense that it requires a high level of execution and may not leave much room for error. AVITA Medical has executed well for several years through significant uncertainty, including a global pandemic and staffing shortages at hospitals. But it might only take one underwhelming quarter to significantly reduce the growth trajectory – relative to 47% annual growth, anyway.

De-Risking Events

AVITA Medical made no changes to its development, regulatory, and commercial timelines for 2023. It did set expectations for an important announcement on the third-quarter 2023 earnings conference call in November 2023.

• The company expects to earn U.S. Food and Drug Administration (FDA) approval for the ReCell System in soft tissue repair and reconstruction (the term expected on the label) in June 2023. A full commercial launch is expected on July 1, 2023 thanks to having all of the commercial infrastructure already in place – a sales team, penetration in key accounts from the burns indication, and reimbursement codes.
• The company expects to earn FDA approval for the ReCell System in stable vitiligo in June 2023. A full commercial launch isn't expected until January 2025 as the company conducts additional clinical trials to earn supplemental approvals and reimbursement coverage in the proper treatment settings. Solt DB Invest still expects AVITA Medical to find a partner for this indication.
• The company expects to submit a next-generation, fully-automated device to the FDA by June 30, 2023. This third-generation device is now expected to be rolled out to support burns and soft tissue indications, too. This has been an important part of our forecast, although the company's previous ownership said the automated device would be reserved for the stable vitiligo indication.
• The company will share its formal plans for international expansion on the third-quarter 2023 earnings conference call in November 2023. International revenue outside of Japan is not included in Solt DB Invest models.

Forecast & Modeling Insights

(Increase in both 2023 and 2024 models.)

Insights into the updated 2023 and 2024 models are provided below. The slight increases in revenue are due to higher-than-expected revenue in 2022. Changes reflecting margin increases and tweaked operating expenses, thanks to more details on the timing of the sales team expansion, are also provided:

• Full-year 2023 revenue of approximately $51.73 million, including:
• $51.08 million in commercial ReCell revenue in the United States
• $0.65 million in revenue sharing from COSMOTEC in Japan
• $0 in BARDA revenue
• Full-year 2023 gross margin of 81.0%, operating expenses of $70.7 million, and an operating loss of $29.3 million.
• Full-year 2024 revenue of approximately $77.59 million, including:
• $76.62 million in commercial ReCell revenue in the United States
• $0.975 million in revenue sharing from COSMOTEC in Japan
• $0 in BARDA revenue
• Full-year 2024 gross margin of 79.7%, operating expenses of $88.5 million, and an operating loss of $27.4 million.

Importantly, Solt DB Invest modeling disagrees with CEO Jim Corbett's assertion that the business will end 2024 with more than $30 million in cash. AVITA Medical may have additional levers to pull to maintain gross margin in 2024 that I'm not accounting for, although increases in sales and marketing expenses and R&D expenses (for clinical trials) appear to dwarf any gross margin surprises.

Regardless, the business will likely seek to raise capital before the end of 2024 and ahead of the stable vitiligo launch in January 2025. A capital raise could include a stock offering, a debt offering, or grabbing a sizable upfront cash payment from a partner in stable vitiligo. It's worth noting that AVITA Medical's improving financial strength gives it more negotiating power, which provides optionality in structuring a partnership and/or licensing deal. For example, it could potentially retain more of the revenue or profit share.

CEO Jim Corbett said in November 2022 there were no discussions or plans to partner the stable vitiligo indication. It was not discussed on the full-year 2022 earnings conference call on February 23, 2023 -- but I'm onto Ol' Slippin' Jimmy!

Margin of Safety & Allocation

(Increase in both 2023 and 2024 models.)

AVITA Medical is considered a Growth (Quality) position. The current margin of safety range based on our 2023 model is below:

• Current Price (market close February 23):  $9.06 per share
• Likely Undervalued:         <$8.89 per share
• Midpoint:                           $11.55 per share
• Likely Overvalued:           >$14.22 per share
• Allocation Range:              Up to 15%

The margin of safety range shared in the dashboard is based on our 2023 model above. Here's how the margin of safety range would change if based on our 2024 model. You can see how a 50% annual revenue growth rate and a low share count really work in our favor:

• Current Price (market close February 23):  $9.06 per share
• Likely Undervalued:          <$13.34 per share
• Midpoint:                            $17.34 per share
• Likely Overvalued:           >$21.34 per share
• Allocation Range:              Up to 15%

AVITA Medical reported 25.296 million shares outstanding as of February 13, 2023. The margin of safety range above assumes 29.090 million shares outstanding, which accounts for another 15% dilution. If the company raises capital through a senior debt note offering or licensing deal for stable vitiligo, then this dilution may not occur, which would make our margin of safety ranges too conservative.

Further Reading

• February 2023 press release announcing full-year 2022 operating results and full-year 2023 revenue guidance
• February 2023 annual filing (10-K) detailing full-year 2022 operating results
• December 2022 article discussing our 2023 and 2024 modeling, including why Wall Street was significantly underestimating the growth opportunity beginning in 2023.
• September 2022 article discussing the CEO transition

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