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Skin in the Game: This Small Biotech Has Strong Potential

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Skin in the Game: This Small Biotech Has Strong Potential

The standard of care for treating severe burns has not changed much for decades. When a large area of ​​skin is injured or lost, surgeons often turn to skin grafts.

Skin grafts require a device that looks like an apple peeler to remove a piece of healthy skin from the patient’s body and implant it into the injured area.

This leaves a person with two large wounds, with the risk of infection, scarring, and a long healing time. This is far from ideal treatment.

Avita Medical (RCEL) – Get Avita Medical Inc. Report Hope to replace this old system with a simpler and more cost-effective procedure. Considering that more than 87 percent of U.S. burn surgeons are trained to use the company’s new device, and that more than 80 percent of U.S. burn centers have ordered it, it’s on track.

The Valencia, California-based company’s ambitions don’t stop there. Avita Medical hopes to use its technology platform to treat traumatic skin lesions, skin diseases such as vitiligo, and even aging.

Investors expect data from two clinical trials in the second half of 2022. The timing — and the valuation and market opportunity — make this small biotech my top pick to buy in August 2022.

What does Avita Medical do?

Avita Medical has developed a skin spray procedure powered by a medical device called ReCell. The product takes just a small patch of a patient’s healthy skin, breaks it down into individual cells, and sprays the skin cells onto the patient’s wound.

This enables up to 80-fold expansion—in other words, a piece of healthy skin the size of a credit card can be used to treat second-degree burns on the entire back of an adult patient.

Development of the product for burns was funded by the U.S. government and is currently in the U.S. Strategic National Stockpile – in case of a major natural disaster or terrorist attack.

In 2018, the U.S. Food and Drug Administration granted ReCell its first new marketing authorization for burns in more than 20 years.

Commercial rollout of the product will take time, largely due to the relatively small size of the U.S. flaring market and the details of regulatory approvals. For example, to date, this product has only been used in special burn centers and certain types of burns. This may change soon.

Avita Medical received broad approval in 2021, enabling ReCell to treat burns of any size in adults and children. What’s more, the company got a new payment code from Medicare that would allow the program to be used in a wider range of treatment settings, such as hospitals.

The company announced a distribution partnership with Premier Inc. (PINC) – Get Premier Inc. Report This could provide access to spray skin cells for more than 4,400 hospitals and 225,000 medical centers.

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Medicare payment codes and distribution agreement with Premier will help capitalize on the nearly $260 million U.S. burn treatment addressable market opportunity (SAM is the total addressable market opportunity that can actually be realized.)

By comparison, Avita Medical expects to generate $30 million in revenue by 2022. That could grow rapidly if ReCell gets approval outside of burns in 2023.

Can data readouts drive growth?

Avita Medical expects to report data from two clinical trials in the second half of 2022.

A trial is exploring the use of sprayed skin cells to treat soft tissue damage from traumatic accidents or infections. The SAM for this indication is $450 million. Importantly, soft tissue injuries are often treated in burn and trauma centers, where ReCell is already in use. If approved, this could lead to rapid commercialization. Another clinical trial aims to demonstrate that ReCell can be used to treat stable vitiligo, a skin disorder characterized by loss of pigment in patches of healthy skin. The SAM for this indication is $750 million.

Management expects to submit regulatory applications for each indication by the end of 2022, which could lead to FDA approval by the end of 2023.

While clinical trials often come with risks and uncertainties, ReCell has a relatively high probability of success. This is because the device has already achieved international recognition in burns, soft tissue injuries, vitiligo and chronic wounds. To date, ReCell products have treated more than 15,000 patients. Investors can have reasonable confidence that the procedure works.

One caveat: clinical trials are not slam dunks. Stable vitiligo studies are small and, in the eyes of regulators, may yield mixed results. This risks redoing the clinical trial, delaying an important indication for several years.

With this, the business has multiple tailwinds.

Avita Medical expects to soon expand into Japan through commercial partners.

Additionally, Avita recently received FDA approval for its second-generation device, which is easier to use, has received U.S. government financial support for its soft tissue injury clinical trial, and can take advantage of the FDA’s recent approval of Incyte (INCY) – Get Incyte Corporation Report Opzelura presents a larger market opportunity for ReCell in vitiligo.

A hidden gem for growth investors

Avita Medical was hit hard in a biotech correction. Then again, few stocks survived. But Wall Street may have overlooked an attractive opportunity.

The business is on a relatively smooth path to generating up to $50 million in revenue in 2023, which may not require additional regulatory approval. In the best-case scenario, sales could reach $100 million a year by 2025.

Meanwhile, 80% gross margins and low overhead suggest the business could be self-sufficient by mid-2000s if all goes well.

The combination of low valuation risk, value-creating products, two potential approvals over the next 18 months, and extraordinary growth potential over the next three years makes this stock my top pick to buy in August 2022.

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