Momentum Keeps Building For Avita Medical

This story features AVITA MEDICAL INC. For more info SHARE ANALYSIS: AVH

Brokers raise target prices for Avita Medical following second quarter results amidst anticipation of exciting prospects in the outlook period.

-Avita Medical has beaten consensus three quarters in a row
-FY24 guidance upgraded
-Recell Go on track for early-2024 launch
-Wilsons sees little downside for shares in year ahead

By Mark Woodruff

In commentary following second quarter results, Wilsons sees very little downside risk for global regenerative medicine company Avita Medical ((AVH)) over the next 12 months. The broker notes growing market anticipation around the expected launch of Recell Go in January.

The ‘risk’ the broker formerly associated with the stock is now largely removed given the company has beaten consensus forecasts for each the last three quarters.

For the first half of FY23, Avita registered 43% half-on-half organic revenue growth related to burns from existing accounts.

Not only does this outcome suggest more surgeons within centres are using the Recell kit, but also surgeons are using Recell in smaller and less severe wounds as they become more familiar with the product, explains Wilsons.

Adding to the overall positive picture: there is no evidence of surgeon/utility churn.

Recell is the FDA-approved treatment for second and third degree burns in paediatric and adult patients, which competes with traditional skin grafts for burns victims, while Recell Go is an evolution of the existing Recell technology for soft tissue and vitiligo, which saves time in the disaggregation of cells.

Vitiligo is a chronic autoimmune disorder that causes patches of skin to lose pigment or colour.

Results for the second quarter came in at the top end of guidance and FY23 revenue guidance was upgraded to US$52m from US$50m (both midpoints in a range) which demonstrates to Morgans sales momentum is just getting started.

Management also guided to a FY23 gross margin in the range of 83% to 85%.

While short term costs will be higher, broker Morgans forecasts revenue growth will average more than 20% over the next five years. Costs are currently being incurred for sales staff, product expansion and post market studies, with Ord Minnett noting the benefit from a stronger US dollar was offset by a higher-than-forecast uplift in sales and marketing expenses.

The net loss for the quarter was -US$10.4m, which Ord Minnett attributes to a more than doubling of the US sales team in the first quarter ahead of Recell’s US launch for soft tissue repair last June.

FDA approval for stable vitiligo was received on June 16 and the aim for management is to conduct a post market study which includes an analysis of the mental health impact on, and cost effectiveness for patients to bolster an application for private payor reimbursement.

FDA approval for Recell Go is expected in late-December, and according to Morgans will be a game changer for the company in terms of sales growth in current markets as well as aiding expansion into overseas markets.

There was only a small period of soft tissue contribution in the second quarter, so, after allowing for a full year of soft tissue sales, Wilsons lifts its 12-month target price for Avita shares to $6.34 from $4.28 and upgrades its rating to Overweight from Market Weight.

While not incorporating sales or cost forecasts for Vitiligo at this juncture, the broker's overall company valuation is diluted for a likely capital raise in the second half of FY24 in preparation for the Vitiligo launch.

The advantage of Avita’s US listing

Wilsons believes revenue growth for Avita Medical is prioritised by its US-centric shareholders. The company is listed on the Nasdaq exchange in the US (under the ticker code of RCEL), as well as on the ASX.

Hence, the broker suggests management’s ability to drive higher revenue growth in the next 24 months with soft tissue, and then the potential of Vitiligo, will drive momentum for the stock and see it trade in line with other high-growth wound care players such as Nasdaq-listed Vericel and Establishment Labs.

Outlook

While Hold-rated Ord Minnett expects Avita’s product pipeline and high gross margins provide a pathway to profitability, this won’t occur in the near-term, and the company will not be cash flow positive prior to 2026.

There was US$69m in net cash and marketable securities on hand as at June 30 and a cash burn of -US$9m for the second quarter, largely flat on the prior quarter.

While Wilsons doesn’t incorporate sales or cost forecasts for Vitiligo at this juncture, the broker’s overall company valuation is diluted for a likely capital raise in the second half of FY24 in preparation for Vitiligo.

According to Bell Potter, there should be some lift in third quarter revenues though the impact should be more pronounced in the final quarter. It’s felt the exit rate into 2024 represents the major short-term catalyst along with the expected launch of Recell Go in January.

FNArena's daily monitoring of Avita Medical consists of three brokers.  Bell Potter has a Speculative Buy rating, Morgans is Buy (or equivalent), while Ord Minnett is Hold-rated.

The average target price of these three brokers rises to $6.60 from $5.74 following the company’s second quarter results, suggesting nearly 16% upside to the latest share price.

Wilsons is not monitored daily. As mentioned above, this broker has upgraded its rating to Overweight from Market Weight with an increased target to $6.34.

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