Good day, and thank you for standing by. Welcome to the AVITA Medical Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jessica Ekeberg, Director of Investor Relations. Please go ahead..

Thank you, operator. Welcome to AVITA Medical's fourth quarter and full-year 2024 earnings call. Joining me on today's call are Jim Corbett, Chief Executive Officer; and David O'Toole, Chief Financial Officer. Today's earnings release and presentation are available on our website, www.avitamedical.com under the Investor Relations section.

Before we begin, I'd like to remind you that this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements. Please review our most recent filings with the SEC for comprehensive descriptions of the risk factors.

Any forward-looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Jim for his comments..

number one, expand RECELL GO adoption. Number two, roll out RECELL GO mini during the first quarter, focused on trauma centers. This will expand our trauma center market by approximately 270,000 full-thickness acute wounds annually. To be clear, we will not be targeting chronic wounds or chronic wound centers. Number three, launch Cohealyx commercially.

Number four, continue to roll out PermeaDerm and finally, number five, we expect the notified body in the European Union to Grant, the CE mark for RECELL GO by the middle of the year, opening up markets in Europe and Australia.

We remain committed to generating free cash flow in the second half of the year and achieving GAAP profitability during Q4 of 2025. In summary, 2024 was a transformational year.

Our expanded product portfolio, which now includes RECELL, RECELL GO, RECELL GO mini, PermeaDerm and Cohealyx has taken us from a $500 million TAM with a single product focused solely on burn centers to a $3.5 billion TAM in therapeutic acute wound care across both burns and trauma centers.

I want to thank our team, customers and shareholders for their unwavering support as we continue to revolutionize the standard of care and therapeutic acute wound treatment. With that, I will turn the call over to David for a closer look at our financial results and guidance.

David?.

Thank you, Jim. For the three months ended December 31, 2024, our commercial revenue was $18.4 million. representing a 30% increase compared to the same period in 2023. This growth was driven primarily by the continued deployment and adoption of RECELL GO in our existing burn centers as well as new accounts in trauma centers.

As we look forward to 2025, we expect RECELL GO mini and Cohealyx to contribute substantially to our revenue growth following their launches in February and April, respectively, with PermeaDerm's revenue also gaining momentum throughout the year.

As expected, our gross profit margin for the fourth quarter improved to 87.6%, recovering from the temporary decline last quarter and slightly increasing from 87.3% in the same period of 2023. As I indicated during our third quarter conference call, Q3 operating expenses were elevated in that quarter due to onetime nonrecurring expenses.

In line with this previous statement, our Q4 operating expenses totaled $26.1 million, a $4.1 million decrease from the Q3 total of $30.2 million. We have no plans to increase our headcount or other operating expenses in 2025. As such, Q4 total operating expenses should be a consistent baseline for each quarter in 2025.

Also note that the total operating expenses of $26.1 million in the fourth quarter include noncash expenses of approximately $2.8 million of stock-based compensation expense and approximately $0.4 million of depreciation and amortization. Q4 2024 operating expenses increased by $1.4 million compared to the same period in 2023.

This increase was primarily due to $3.9 million rise in sales and marketing expenses stemming from employee-related costs within the expanded commercial sales organization. G&A expenses decreased by $0.6 million due to lower salaries and benefits as well as reduced professional fees.

Similarly, R&D expenses declined by $1.9 million reflecting lower outside professional fees due to the completion of the Vitiligo TONE study. Other income expense shifted from $6.3 million in income in the same period in the prior year, to an expense of $0.3 million in the current quarter.

The $6.6 million decrease primarily resulted from a onetime noncash gain of $9.4 million from the wind down of our foreign subsidiaries, offset by the change in fair value of the warrant liability.

For the fourth quarter, other income expense consisted of a noncash charge of $0.7 million related to the change in fair value of the warrant liability, offset by $0.4 million in investment income. Briefly, I'd like to address the guidance announcement made on January 7.

We have gained a better understanding of the year-end purchasing patterns among our key customers. At the end of Q4, several top accounts strategically chose not to finalize pending purchase orders due to year-end cash preservation strategies leading to an approximately $3 million to $4 million revenue shortfall.

Importantly, these deferred purchases were due to timing decisions, not a lack of demand, or commercial operational issues on our part. During January, we experienced normal purchasing activities, which should result in renewed strong first quarter revenue growth. Moving on to the full-year results.

For the full-year ended December 31, 2024, our commercial revenue increased 29% to $64 million compared to $49.8 million in 2023. It was disappointing to have the revenue miss in the fourth quarter.

But as you can see from the slide, we do not want to lose sight of the fact that we have had significant year-over-year revenue growth for the last five years. The 29% growth in 2024 was driven by the RECELL GO transition, deeper penetration within existing accounts and new account growth targeting trauma centers.

The gross margin, for the full-year was 85.8%, meeting the higher end of our previously given guidance of 85% to 86% and up 130 basis points from 84.5% in 2023. Total operating expenses were $111.8 million compared to $86.4 million in 2023.

The increase is primarily attributable to $20.9 million in higher sales and marketing expenses, reflecting employee-related costs from our commercial team's expansion. G&A expenses rose by $4.9 million due to increased headcount, along with higher salaries and benefits and stock-based compensation.

R&D costs declined by $0.5 million primarily due to reduced professional fees, partially offset by higher employee-related compensation costs within our medical science liaison team. Other income expense for the year decreased by $8.3 million, moving from $8.5 million in income in the prior year to income of $0.2 million in 2024.

This change primarily resulted from onetime noncash gain of $9.4 million in 2023 from the wind down of certain of our foreign subsidiaries, offset by a change in the fair value of the warrant liability. Interest expense increased by $4.2 million year-over-year attributable to the long-term debt of $40 million under the OrbiMed credit agreement.

Net loss for the fourth quarter was $11.6 million or a loss of $0.44 per basic and diluted share compared to a net loss of $7.1 million or a loss of $0.28 per basic and diluted share in the same period in 2023.

Net loss for the full-year 2024 was $61.8 million or a loss of $2.39 per share compared to a net loss of $35.4 million or a loss of $1.40 per share in the prior year. As of December 31, we had $35.9 million in cash and marketable securities. As reported last quarter, we utilized $9.7 million in cash during Q3.

We continued this downward trend, further reducing our use of cash to $8.5 million in the fourth quarter. This reduction was achieved despite an increase in accounts receivable, which rose by $4.1 million to a total of $11.8 million as of December 31, 2024 compared to $7.7 million as of December 31, 2023.

Note that our days sales outstanding or DSO did not increase. As we move towards generating free cash flow in the second half of 2025, we anticipate that our use of cash will continue to decline over the next three quarters.

In connection with our debt facility with OrbiMed, we executed an amendment today to lower the trailing 12-month revenue covenant for quarters ending March 31, 2025, through March 31, 2026. The 12-month trailing covenant of $115 million for quarters ending after March 31, 2026, remains unchanged.

Looking ahead for the full-year 2025, we expect commercial revenue to be in the range of $100 million to $106 million, representing growth of 55% to 65% compared to 2024. Additionally, we expect to generate free cash flow in the second half of this year and achieve GAAP profitability during Q4 of 2025.

As previously stated, we do not foresee any further expansion of our commercial organization over the next 18 to 24 months. This revenue guidance and financial projections are consistent with our announcement made on January 7.

We remain confident in the success of RECELL GO, the April 1 full commercial launch of Cohealyx and the rollout of RECELL GO mini, combined with the growing adoption of PermeaDerm. These strategic efforts position us to deliver strong results this year and drive significant shareholder value.

With that, I will turn the call back to the operator for your questions..

Thank you. [Operator Instructions]. And our first question comes from Matthew O'Brien with Piper Sandler. Your line is open..

Hey this is Phil on for Matt. Thanks for taking our question.

For starters, I guess just on the cadence of the guidance, would you expect similar sequential growth each quarter? Or might it be a little bit more back half weighted given the contributions from Cohealyx and maybe some timing of VAC?.

Yes. Well, now we have a little bit more complex of multiproduct rollouts will create some complexity in answering your questions. So let me try and do it simply. Consecutively, from Q4, you should expect we'll be up notably in Q1. By that time, we'll be in full launch with RECELL GO mini and PermeaDerm is now additionally gaining a lot of momentum.

So Q2 should then also be up sequentially.

And yes, you're right that Cohealyx has such a big revenue impact in the back half, it could have a very significant effect, but I see us having a consecutive quarter cadence increasing over prior quarter with -- so to speak, we have plenty of gunpowder here and a lot to execute, but plenty to keep our revenue line driving.

So I would expect that cadence to be rather strong during the year..

That's helpful. And I guess just sticking with guidance and trying to dive down a little deeper as for what's assumed in the growth of the three product categories I think in your prepared remarks, the guidance assumed somewhat significant contribution from Cohealyx.

I was hoping if you could provide a little bit more color on what that might entail as far as market share gains pretty quickly in the second half of '25, maybe attachment rates to Cohealyx on current RECELL procedures, that sort of thing, just to get us a little bit more comfortable with that second half..

Yes. We're not going to break out, I think, by product at this point today, but I'll give you a way to think about it that when I gave you the breakout of what the TAM is per case, we do -- if you recall, the RECELL contribution, the PermeaDerm contribution, the potential Cohealyx contribution.

If you just looked at burns, for example, we treat about 1,000 burn cases a month in the last quarter or two, right, at about that rate. It's growing. And those averaged in excess of 10% total body surface area. So if you try to figure out how -- it's kind of an equation we don't know the answer to, which is how quickly we get through VAC.

But as soon as you do, the revenue upside is considerable. So we'll get some experience about that.

We've taken a very careful approach with a limited market release here in Q1, where we're doing cases where what we're doing is gathering clinical data because it's post approval, and then we're in the process of enrolling Cohealyx 1, which by virtue of the very significant difference, we're proving, right? Seven days to graft versus in some cases, 20, you don't need a big number of patients to prove that statistically.

In fact, it's approximately 40 patients to achieve full enrollment. So that will give us a lot of support in the first -- by the end of the first half -- think about that..

Thanks so much..

Thank you. Our next question comes from Ross Osborn of Cantor Fitzgerald. Your line is open..

Hey guys, this is Matthew Park on for Ross today. Thanks for taking the question.

I guess starting with mini -- as you continue to roll out mini, are there any trends in adoption or feedback that stand out that kind of give you confidence once you go into this full commercial launch?.

Well, actually, what's good about mini is it's used in the same RPD, the same processing device. It's actually the cassette design is exactly the same from a manufacturing point of view, the three wells that you put skin and buffer and enzyme in are just smaller. And so it's very easy to use.

And this concept where a doctor would feel like, wow, I'm using a 10% total body surface area treatment to treat a less than 2.5% total body surface area problem that seems wasteful. That's how they felt when we did the market research on it.

So actually, the vast majority of those 270,000 surgical and trauma wounds are under that 480 square centimeters at 2.5%. So we're quite optimistic. It's been just less about just a month. So it's a little bit early for trends. But we, of course, don't have -- they've already got the RECELL processing device.

So it's a rather easy additional choice for them. So we're quite optimistic about it..

Got it. That makes sense. And then just one more from me.

Do you mind reminding us again what drove the high gross margin in the quarter? And I guess, how we should think about the general cadence of gross margin in 2025?.

Yes, this is David. Thanks for the question. As far as the gross margin for the quarter was over 87%. We believe that our gross margin for RECELL products will stay in that range, 85% to 87%.

Overall gross margin is going to go down because of the distribution arrangements we have for Cohealyx and PermeaDerm, which we share gross margin on that basically 50-50. So as those products become more significant in our portfolio and our revenue mix, our gross margin overall is going to go down.

But as I've said and as you probably know, that profit margin all drops to the bottom line because there's no additional cost to generate that revenue. So our overall gross margin may have a small decrease, but we're still going to be in a better position from an operating profit margin basis..

Got it. That makes sense. Thanks for taking the questions guys..

Thank you. Our next question comes from Ryan Zimmerman of BTIG. Your line is open..

Good afternoon.

Can you hear me okay?.

Hear you well, Ryan.

How are you doing?.

Good, good. Thanks for taking the question. A couple of questions for me, guys. So first, Jim, I appreciate you're not breaking out guidance by product.

How much of international sales is contemplated in the guidance? And when do you expect potentially a clearance in Europe?.

Yes, it's a great question. It's modest, Ryan. And the reason it's modest is we just -- we've been through the substantive review with the notified body. And as a fact, they are -- let me see exactly, they had committed to us approval in October. So we're now in February and we don't have it yet.

So we don't have any technical challenges, but we have an unpredictable process. So we -- that's representative of our midyear expectation yet there's no more submission materials to be reviewed or submitted at this time. So it is modest..

Okay. And then the inventory that was in the channel in the fourth quarter, Jim, a couple of questions on that. So one, how much of that was RECELL? How much of that was PermeaDerm. And was all of that worked down in the fourth quarter? Because David, to your comments that you expect the sales to pick up in the first quarter.

Is there -- I guess I'm just wondering why there isn't inventory to be worked down in the first quarter necessarily from what was in the channel kind of late in December..

Yes. So a couple of comments. The majority of inventory for us, RECELL -- I mean, the PermeaDerm is still a small part of our inventory. I mean -- excuse me, our sales fundamentally. We have inventory on the balance sheet. And -- what's different in the PermeaDerm is the really rather large increase in evaluation. So we're getting the traction.

It took us a little while to basically develop the clinical support materials that are necessary because it was not on the market really before even though it had been test launched, I guess, by Milliken before.

With respect to your question, keep in mind, all of our customers have inventory on the shelf because of the nature of our business, right? We're a therapeutic acute wound business, right? So when the patient shows up, they have to have it.

So we are not having any signs that would suggest that there's inventory to work off to make our revenue successful in Q1. So I don't think that's going to be -- that's not showing as a challenge to us at the moment..

Okay. Last one for me, I just want to sneak one in -- no, that's helpful, Jim. I mean the last one for me, David, there's a little lease revenue this quarter.

And so I'm just wondering if you expect that to be a bigger trend in the placement of systems over time as you think about your guidance, the $103 million?.

Yes. So the lease revenue is just a portion of the overall RECELL sale of the RPK and RPD -- RPKs. We, as you may remember, provided our hospitals and facilities with the RPD, the processing unit at no cost.

And for accounting purposes, and this is only for accounting, we have to allocate a portion of the revenue from the sale of the RPKs, the actual disposable kits between revenue and lease revenue. And that's what that is. It really isn't lease revenue. It's an accounting treatment that is required..

Okay. That's very clear. Go ahead..

It might even be very helpful, too. It really -- it's almost worth thinking about it as the amortization methodology for the cost of the RPD..

No, that's what I was trying to understand because I just was wondering if potentially the model is changing in terms of how you're placing systems necessarily -- that's what I was trying to understand. Yes..

We're not..

Thank you..

Thank you. Our next question comes from Brooks O'Neil of Lake Street Capital Markets. Your line is open..

Thank you. Good evening. So I have not had a chance to read the 8-K related to the OrbiMed renegotiated credit agreement. But in the prior one, there was some question about the quarterly covenant that I considered as a giant deal to have to begin repaying that debt.

But can you just give us a sense for how much of a cushion you've gotten in, for example, Q1, Q2 and Q3 as you look toward the end of this year?.

Yes. Brooks, thanks for the question. All of the details are in the 8-K, but I'll give you the details for these first two quarters. The revenue is on a trailing 12-month, and for the first quarter, it is now $73 million, down from $75 million for the last 12 months. For Q2, it's now $78 million, down from $90 million. There was a significant decrease.

It doesn't give any indication that, that's what we think our revenue is going to be. It just gives -- as you said, a little bit of cushion so that we don't have to repay the debt..

Right.

And I'm guessing, but again, I haven't read it, the terms are substantially the same? Or has there been a big change in terms of the -- what happens if you happen to break the covenants under the new agreement?.

The terms remain the same..

Term is the same. Great. Okay. And then the second thing I was curious about is it's my sense that with Cohealyx, you've got the initial approval based not so much on human clinical evidence, but animal work.

And I'm curious, you mentioned or Jim mentioned the -- what sounded like tremendous success at I think Ohio State, but -- can you just give us some color on whether you're beginning to amass sufficient clinical evidence with humans to support the notion that Cohealyx can be a material contributor to your revenues in the back part of 2025?.

Yes, Brooks, I can. So we received approval for that dermal matrix consistent with the market in terms of how you get -- what the FDA requirements are. They're pretty clear. Now the work we did in the validated porcine model, that's quite a scientific project, and we did it 18 times.

So we've looked at a lot of different materials, and we were looking for very precise qualities of histological absorption, yet providing the matrix structure or in growth of blood vessels and yet have it go away so they don't have to remove it. All those kinds of factors.

And it has a lot to do with how you sterilize it and how you process the denatured collagen. So when we applied our preclinical data, we probably showed it to at least 50 physicians at this point. We haven't met one yet. We didn't want to try it.

Okay? So that's kind of a piece of information, right? We've done a number of cases because of course, it's approved that are not in the study and so far, all of them have remarked how well it handles intra procedure, and it is producing the clinical outcome in the short run, not all of them have reached the seven days because we only have done this recently, already to graft, but none have taken longer at this point.

So we really feel good about -- and those are in humans. So we plan on having 20 sites to enroll those 40 patients. So we expect that we'll be able to do a couple of things that is -- that are by design. And let me share them with you. So on one hand, it's a study with an IRB, it's under controlled follow-up. On another, it's a post-market study.

So in the agreement, during the course of the study, let's imagine that A site has five patients enrolled. That physician can share that data with us or on the podium or in an abstract during the period of the study. So we don't have to wait until the study fully enrolls and becomes published in its aggregate sometime late in the year.

Rather, we will be able to use that data as it's developed. And that was very intentional as part of the study design. So in any event, that's -- I think we're going to have the data by April 1 that supports a strong launch at that time..

Great. I guess, I'll just finish by saying I'm amazed at how much you guys have accomplished. Congratulations and keep it up..

Thanks, Brooks..

Thanks..

Thank you. Our next question comes from Joshua Jennings of TD Cowen. Your line is open..

Hi, good afternoon. Thanks for taking the question. I'll echo Brooks comments on congratulations on the progress. Just hoping to follow up on Brooks' question as well, just on adoption pace of Cohealyx. And I think Cohealyx going to be running a cost-effectiveness study within.

And I think cost effectiveness for RECELL and burns was a big driver of adoption realization. You cited the first case in Ohio State that the patient was discharged in 10 days when surgeons expectations for her, the severity for a wound would have been closer to 30.

I mean how big of a driver do you guys anticipate that length of stay reduction and cost effectiveness to be over time for Cohealyx adoption utilization?.

Josh, we think it's going to be a very large deal, and it very well fits with the RECELL theme. As you know, there's a lot of data out there that demonstrate that patients treated with RECELL exit the hospital 30% sooner. And Cohealyx fits that theme.

And when we work to get cost justification for RECELL, that is a very important matter for hospitals these days. And it should be -- and so a very important matter for the treating physicians and the patients they treat. So this seven days, we think, is going to be very determinant and giving us some leverage in terms of adoption.

And by the way, the study contemplates inclusion with Cohealyx alone or Cohealyx with RECELL. So it won't -- it will have both enrolled -- so it's really looking at standard of care..

Great. And then just thinking about the Cohealyx 1, 40 patients enrolled and just the VAC process. I mean, is that enough -- I'm assuming your expectation is that Cohealyx 1 will be enough for most VACs to get over the hump and give a positive decision or how do you see that playing out? Thanks for taking the questions..

Josh, I think in the near term, what will be important will be the following. They will want to see the preclinical data in the VAC because it's published -- in publication now. They want to see the case studies that we have done in real time.

Third, they will want to have us be at a price point that saves them money or they will want to not have to buy the inventory, and they will appreciate the consignment RFID system that we're going to market with. So I think all of those will contribute to a faster VAC time..

Excellent. Thanks, Jim..

Thank you. That concludes our question-and-answer session. At this time, I would like to turn it back to Jim Corbett for closing remarks..

Thank you, operator. and thanks to all of you for calling in and listening. We are really excited about the transformation of our company, AVITA Medical into a therapeutic acute wound care company. We have a lot of excitement for the year ahead. I'm looking forward to sharing it with you. Thank you..

This concludes today's conference call. Thank you for participating, and you may now disconnect..