Avita Medical (AVH.AX & AVMXY) is a small Australian company developing a spray-on skin product called ReCell, for treating wounds and various skin defects such as burns, ulcers, scars, and skin depigmentation.
ReCell is their lead product; it is in Phase 3 clinical testing for treating severe burns. Trials to date show ReCell as an effective and safe treatment. In fact it is already approved and being used outside the US. ReCell is patented, CE-marked for Europe, TGA-registered in Australia and CFDA-cleared in China.
The ReCell treatment harnesses a patients’ own skin regenerative properties. The treatment involves grafting a small healthy skin sample from a patient and then placing it into the ReCell device where a suspension of skin cells is created. The skin suspension is then sprayed over the damaged skin area. The skin suspension can be created quickly in about 30 minutes and the suspension can cover an area up to 80 times larger than the grafted skin area. Trials to date have shown many benefits to ReCell including faster healing, less patient pain, reduced donor site harvesting, reduced scarring, lower cost, and improved appearance.
Two Australian women created ReCell in the 1990s, surgeon Fiona Wood and scientist Marie Stoner. Dr. Wood was awarded Australian-of-the-year after ReCell was successfully used to treat victims of the 2002 Bali bombing. This year again ReCell was used in an emergency response at Taiwan’s waterpark explosion where hundreds of people received severe burns. The US government is now interested in ReCell for their own disaster preparedness.
Unfortunately ReCell has been slow to commercialize, to date only around 6,000 units have been used worldwide. The lack of a US FDA approval is probably the main reason for its problems. AVH is now actively working to gain FDA approval which will help to validate their product and improve their worldwide commercialization efforts. A US FDA approval is considered the gold-standard for new medical treatments.
Another significant issue holding back ReCell’s commercialization efforts was its unit’s limited ability to only treat small wounds (covering 320sqcms). AVH has now developed a new next generation ReCell unit that can treat an area six times larger than the previous model (1920sqcms). The new model will improve commercial prospects because now more patients can be treated and with much larger skin disfigurements.
ReCell is about half-way through enrolling patients in their Phase 3 trial. Recruitment completion is expected near the end of 2015 and initial results are expected in 4Q2016. If the trial is successful, which I expect, FDA approval will be granted around 3Q2017.
AVH is heavily undervalued
at its current market cap of $31.9M. My model estimates peak sales for severe
burns alone around $60M in 2020. Using a price/sales multiple of 3 that gives
AVH a projected market cap of $180M which is much higher than its current
valuation of $60M. AVH at today’s levels has a least a 230% upside.
For my valuation modelling I have assigned ReCell a unit price of $4,000. The new next generation ReCell unit can treat a wound area six times larger than the old unit so its price should be nearly 6 times higher. Since the old ReCell unit is priced around $1,000, I am conservatively pricing the new unit 4 times higher at $4,000.
My model uses a China severe burn patient population figure of 160,000. This is a very conservative number because it is only 2 times larger than the USA patient population. China is likely to have a patient population more than 4 times larger than the USA.
To reach peak sales AVH will likely require partnering with a manufacturing/distribution company so I have included a 50% royalty rate.
AVH is seeking FDA approvals in two other more lucrative indications Chronic Wounds and Aesthetics & Repigmentation. I have not assigned a value for either of these indications because they are much further behind in clinical development.
AVH has $3.0M cash on hand with a burn rate of $1.9M per quarter so they will require a capital raise by this year’s end unless they can partner-up before then.
Disclosure – AVH.AX is a very small AU medical company that carries substantial risk. While its potential returns may be high its losses may also be high.
I am long AVH.AX
I do not short stocks
