Q3 2022 AVITA Medical Inc Earnings Call

November 10, 2022

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

[music].

Okay.

Good day, and thank you for standing by and welcome to the Davita Medical third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone please be advised that today's conference.

Is being recorded I would now like to hand, the conference over to your speaker today, Jim Corbett CEO . Please go ahead.

Thank you operator, welcome to our BD medical third quarter 2022 earnings call. Joining me on today's call are Jim Corbett.

Executive Officer, and Michael <unk>, Chief Financial Officer. This call will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

All statements made on this call that did not relate to matters of historical fact.

Forward looking statements, including statements regarding the markets in which would be the medical operate trends demand and expectations for its products and technology, It's expected financial performance expenses and position in the market and the impact of COVID-19 on its operations and at the customer's operations.

These statements are neither promises no guarantees and involve known and unknown risks and uncertainties that could cause actual results performance or achievements to differ materially from any results performance or achievements expressed or implied by the forward looking statements.

Let's review, our beta medical and most recent filings with the SEC, particularly the risk factors described in our beta Medicals F. Three and 10-K filings and then Davita Medical <unk> quarterly report on Form 10-Q for the third quarter ended September 32022 for additional information.

Any forward looking statements provided during this call, including projections for future performance are based on management's expectations as of today.

Medical undertakes no obligation to update these statements except as required by applicable law.

Davita Medical press release, the third quarter 'twenty to 'twenty. Two result is available on its website www dot davita medical Dot com under the investors section and includes additional details about our financial results.

Davita medical website also at the latest SEC filings, which you're encouraged to review.

A recording of today's call will be available on a beta medical website by five P. M Pacific time today.

Now, it's my pleasure to introduce you to Jim Corbett, Jim is a five time life Sciences' CEO with over 30 years of experience, leading global commercial stage company.

Deep expertise spans across many medical specialties on technologies with fast technical experience in the medical device industry.

Additionally, Jim brings extensive experience across the capital markets, having served in both public and private companies with that I would like to turn the call over to Jim for his comments on third quarter 2020 to business highlights.

Thank you Carolyn.

Good afternoon, everyone and thank you for joining us today.

Before I express how excited I am to be here I want to take a moment to thank and recognize Dr. Mike Perry.

Gary served as CEO for the past five years, and we are grateful to enforce important contributions during his tenure.

I'm often asked what about Davita attracted me to come and join the team.

As in the visa board member for the past five quarters have become very familiar with the business and its challenges and opportunities.

What I saw was a transformative technology, there's already brought home to thousands of patients and an opportunity to work with a great team to bring this technology to thousands more.

To illustrate that I would like to share with you a recent patient journey, which has inspired me and the team of Davita.

Charlie and Xavier.

He's working on a project at our family's brewery in Virginia, when a life life changing accident, and Gulfstream flames, causing third degree burns to over 85% of the body.

At the VCU, Evan Hanesbrands Center enrichment, she was given a slim chance of survival with the expectation of a 12 month stay in the ICU.

Instead, Joanne left the hospital nine days shy of six months to.

What's your husband credits resale is a significant part of our successful recovery.

Charlie Anne and her during husband Andre are now focused on giving back by providing hope to anyone suffering from from.

From a traumatic brain injury.

Thank you Charlie and Andre for sharing your story of tragedy and triumph.

This is the kind of life changing impact we saw continues to provide other patients and one of the main reasons I'm thrilled to have the opportunity to join a beta.

This story and others, we have related to truly demonstrates the importance of our burn work.

Now I'd like to take a moment and discuss the initial priorities that I have been focusing on during my first 100 days as CEO .

First developing the commercial plans for burns and soft tissue repair to drive our growth and preparing to execute on that plan.

Secondly.

The FDA submissions for soft tissue repair and vitiligo are expected during December 2022 with approvals expected in June 2023.

Just last week, the FDA informed us that the resale system has been granted breakthrough device designation for both the soft tissue repair submission and the vitiligo submission.

The breakthrough devices program facilitates active interaction with the FDA and prioritizes. The review of subsequent regulatory submissions, including our submission is expected in December .

Finally, the automation of the resale device for the soft tissue repair and Burns program, which will be followed by an automated device for vitiligo.

Our growth for the next 24 to 36 months will be driven by the burns in soft tissue repair markets.

The soft tissue repair market will expand our hospital call point and treating physician call points by nearly three times.

This expansion of market opportunity as the foremost commercial priority of the company.

The <unk> program will be focusing on achieving reimbursement supporting early commercial cases, and clinical development in support of those initiatives, which we believe we will accomplish by Q1 2025.

Now, let me discuss our Q3 results.

We had a strong topline revenue performance with $9 million in commercial revenue in Q3 2022.

Which is a 30% increase over the same period, the prior year and a 9% increase on a consecutive quarter basis.

Keep in mind that commercial revenue includes all global revenue and excludes the $1 million in BARDA revenue booked in the quarter.

I also have a Japanese market update.

In early September the Ministry of Health Labor and welfare, commonly known as <unk>.

Granted the resale system marketing approval for the treatment of acute burns in Japan with very favorable reimbursement of 970000 yen for our standard device, which is approximately $7000 converted at the current exchange rate.

We of course share that revenue with cosmetic the end customer reimbursement prices slightly higher than our current pricing in the U S of which a vida received 40% from our partner Kosmos Tech.

Cosmic <unk> is preparing to launch we saw and we have received an initial stocking order of $555000 from cosmetic in September .

As a point of note other than U S revenue, we do not intend to release country specific revenues in the future unless there's some unusual event that causes us to do so.

Let me provide an update on our ease of use product.

Started selling the ease of use device in Q1 to our larger accounts, which has been well received by our customers one of the reasons customers prefer this version of Russo.

<unk> the workflow mitigates the SaaS staffing shortage and reduces the training efforts that both the customer and the davita team need to perform.

We plan to expand the availability of our ease of use product in the upcoming quarters.

With regard to the soft tissue repair market, we are prioritizing our soft tissue repair launch given our existing codes the overlap with level, one and two trauma centers and our existing firm center customer base.

And the ability to leverage and expand our current salesforce, one clear upside in prioritizing soft tissue repair is that we will have immediate reimbursement.

While burns is primarily inpatient we also have outpatient reimbursement through our transitional pass through code with our soft tissue repair indications, we find the majority of patients in level, one and two trauma centers being treated in the outpatient setting.

Thus, we have been educating our burns customers' customers on how to utilize these codes correctly.

Further approximately 50% of our current burn centers overlap into level, one and two trauma centers. Thus we gained significant leverage from our sales organization as we expand in the coming year.

Earlier this year.

We released the top line results for our soft tissue repair trough.

<unk> had two co primary endpoints, one endpoint had a hypothesis of superiority or donor skin sparing and the other co primary endpoint at a hypothesis of non inferiority for healing.

Based on Airways comparisons for each subject received both resell treatment and standard of care treatment as the study control I am pleased to report that both co primary endpoints have been met for donor experience superiority and non inferiority fueling for resale in soft tissue repair.

And our initial analysis helium endpoint for resale versus control did not reached pre specified statistical non inferiority. However, after data re verification and associated corrections and updated analysis has revealed that the healing endpoint has been met.

Now, let's spend a few minutes on vitiligo.

For those of you who might be new to Davita vitiligo is a chronic autoimmune disease that attacks pigment producing cells, resulting in spots are patches of lighter white.

Pigmented skin.

Non threatening non life threatening it can occur.

Anywhere on the body and can result in severe psychological duboeuf patients due to perceived disfigurement.

Today vitiligo affects up to 2% of the population worldwide, including an estimated $6 5 million Americans in September we announced results from our pivotal clinical trial evaluating.

Evaluating the safety and effectiveness of the resale system for re pigmentation of stable vitiligo lesions, we met our primary endpoint in this trial.

Let me share a little bit about that importance. It is unique as there has never been a trial that effectively treat vitiligo with cellular transplantation.

The study compared success rates and a design, where each patient randomly received resale treatment in one portion of the Depigmented area.

The study control was the standard of care narrow band Ultra Violet be phototherapy, which is typical first line treatment for vitiligo.

Re pigmentation was evaluate six months after treatment by an expert Central Review Committee CRC, the CRC reported 56% of resale treatments versus 12% of controlled treatments.

<unk> and repeat re pigmentation of more than 50% of the treated area.

CRC also reported.

36% of resale treatments versus zero <unk>.

Percent of controlled treatments resulted in re pigmentation of at least 80% of the treated area, establishing super superiority for the primary endpoint.

We've had an opportunity to review this data with our medical advisers. The response was enthusiastic, particularly because they have no treatment that choose to this result in six months.

These are the first results from our U S randomized controlled trial of the resale system in treating patients with segmental and non segmental stable that legal.

And provide a foundation for communicating favorable clinical benefit.

We intend to submit to the FDA for this indication in December of this year with approval expected in June 2023.

We're tremendously excited about the pending submission and subsequent approval in June 'twenty three.

Going forward, we will be working with private payers and CMS to establish reimbursement for the vitiligo resale treatment.

Currently we believe we can achieve this by January 2025.

During the interim period, we will continue to conduct vitiligo clinical research to support the ideal patient selection and treatment regimen for the broader population of <unk> patients the pure scale of the market in a significant benefit to these patients will be further enhanced by our automation program, which will allow for physician office treatment with the resell.

For <unk>, we will keep you current with our progress on the automation clinical development and reimbursement.

Finally, I'd like to take a moment to emphasize the growth drivers for 2023.

First and foremost we are focused on accelerating growth in our byrne's business through greater penetration in burn centers and greater adoption by burn surgeons and expansion of our commercial organization.

We're planning a full and immediate launch into the soft tissue repair market in July 2023, following the expected FDA approval in June 2023.

We plan to hit the ground running at launch with an expanded field force in place as well as with commercial support resources and programs.

Looking at this strategically our growth in 2023, and 2024 will be driven by the penetration of the burn in soft tissue repair markets in the U S followed by the achievement of reimbursement for <unk> for a full launch in January 2025.

With that I'd like to turn it over to Michael holder Chief Financial Officer.

Thank you Jim.

Our commercial revenue, which excludes BARDA revenue increased by 30% or $2 1 million to $9 million.

$9 million in the three months ended September 32022.

Compared to $6 9 million in the corresponding period in the prior year.

Total revenue, which includes BARDA revenue increased 30% or $2, one to two to $9 1 million compared to $7 million.

The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the commencement of commercial sales with our partner cosmetic and Japan.

Gross profit margin decreased by 2% to 83% compared to the corresponding period in the prior year.

Total operating expenses increased by 16% or $2 million to $14 2 million compared to $12 $3 million in the corresponding period in the prior year.

The increase in operating expenses is attributable to higher compensation costs pre commercialization costs research and development expenses, partially offset by lower share based compensation expenses.

Higher compensation costs were primarily a result of an expansion of our commercial team.

Along with an increase in commissions, which resulted from an increase in commercial revenues.

In addition, we incurred severance costs in the current quarter associated with the termination of our former executive employee.

Higher pre commercialization costs were driven by activities related to future resale watches and soft tissue repair and <unk>.

Increased research and development expenses resulted from ongoing development of next generation devices for more automated preparation of spray on skin cells.

Higher research and development expenses were partially offset by lower clinical trial expenses for soft tissue repair and <unk> as trial participants were in less costly follow up phases. This period compared to more costly recruitment and treatment phases in the prior period.

Share based compensation expense was lower in the current period as certain performance milestones were met in the prior period.

And there was a reversal in the current period of previously recognized expense for Unvested awards related to the termination of an executive officer.

Net loss decreased by 6% or <unk> 4 million to $5 6 million or <unk> 22 per share compared to a net loss of $5 9 million or 24 cents per share in the corresponding period of the prior year.

Adjusted EBITDA loss increased by 2% or 84000 to $4 million compared to a loss of $3 $9 million in the corresponding period in the prior year.

A table reconciling non-GAAP measures is included in the related press release for reference.

Turning to guidance full year 2022, commercial revenue guidance is revised and increased to a range of 33% to $34 million.

$30 million.

Excluding BARDA revenues, which represents an approximate 33% increase year over year.

We continue to project BARDA revenues of approximately $3 million in calendar year 2022.

With that we thank you for your attention and now I will turn the call back over to the operator for your questions.

And thank you.

As a reminder to ask a question you'll need to press star one on your telephone please standby, while we compile the Q&A roster.

One moment for your first question.

And our first question comes from Brooks O'neil from Lake Street Capital. Your line is now open.

Hi, This is Charlie monitor hang on for Brooks O'neil.

Thanks for taking my question.

My first question is.

How will the fast track designation is change the way you guys approach the soft tissue and vitiligo.

Thanks, Charlie This is Jim since it's my first time chartered to speaking with you.

<unk>.

The principal contribution.

The.

Designation gives us is it.

Clauses for essentially a very dynamic and real time review process within our prioritization with FDA.

Number one benefit that we will enjoy with both submissions.

Soft tissue and double aisle.

It also will help US later as we develop reimbursement for vitiligo. So those are the two principal benefits of that designation.

Okay. Thank you thanks for that clarity and then my next question is.

How is the hospital environment return to normal and if it's in that kind of where.

Are we and where do you think.

Or do you see that.

The hospital environment over this winter.

Well overall.

<unk> hostile environments return to a place where we have good access in terms of our selling time.

Very good access in terms of our support of.

Physicians and their staffs in terms of training as well as supporting cases, so we actually are not heavily impacted by the hospital environment, We do see.

There is some.

Staffing shortages, which causes us to have to do a little bit more training.

The SaaS net users of course, selling time to do that but I wouldn't characterize it as a dominant or significant.

Challenge for us in the current time as we see it.

Okay, great. Thanks, that's it for me.

Thank you Jonathan and thank you.

And one moment our next question.

And our next question comes from Matthew O'brien from Piper Sandler Your line is now open.

Afternoon. Thanks for taking my question. So I just wanted to make sure we tease out what what Youre getting from Japan versus the increase in guidance I think you said, Jim $5 55 here in Q3.

Going to get some more.

From Cosmic <unk> Tech in Q4 as far as a bulk order and then I guess just to kind of wrap up the question. If it's at about $1 million. Then you have a $2 $5 million increase in the guide. So so clearly the fundamentals are picking up can you just talked about what that is from in terms of share taking or if it's our penetration.

Existing accounts versus new accounts that you're onboarding.

Thanks, Matt well, let me take those in order and roof with respect to Japan you are right.

Initial stocking and it was $555000.

And we do not yet have a clear view on the pace of the launch although there was a quite a number of cases performed in the last 30 days. So we know that they are active and they're consuming that that initial stocking order.

We're expecting that during the next quarter, we will get some visibility on the coming year and when we get that we're going to do.

Communicate that to you and the rest of the market.

The.

In terms of our core.

We did add during many new accounts because of course as you know burns markets somewhere $1 $41 50.

Burn centers in the United States. So our uptick in revenue is reflective of increased penetration.

So we are getting increased penetration in our broader abuse by surgeons, so and we expect that to continue.

As part of our soft tissue repair initiative over the next six months, we will be increasing.

Coverage profile of our.

Salesforce, where they have time to be deeper in the accounts, which is where the action is of course.

Got it okay. So just to be clear only 500000 of the $3 $5 million increase for the year.

It's from Japan.

$3 million.

$3 million as domestic that's correct 555, okay.

Got it got it okay, sorry, I'm using round numbers to make it easy.

And then the second one is I don't want to get into vitiligo too much because you've got a lot of opportunity on the burn and soft tissue side, but I just want to make sure that the message is clear here.

We're still very bullish on the vitiligo I don't know.

Words in your mouth, but it seems like you are still very bullish on the opportunity, but just given your resources and the opportunity for it.

Our soft tissue plus burn that's the focus now do a lot more work to get reimbursement in place of another growth driver of a big market and 25% in the back half of the decade is that the right way to.

Yes, I think so when you look at <unk> first of all our results have been.

Just received fantastically enthusiastically by acquired medical advisors.

There is no such treatment for these patients that achieved the result that we have.

<unk> and our trial. So we're extremely bullish on it that said, we need to get reimbursement sorted out and that will take a little bit of time, we estimate that right now.

The chance to really get into that strategy and I have a fair bit of experience in reimbursement.

The January 25, right now our plan looks as though that it will when.

When we succeed at that and.

And that will of course drive 25 forward with vitiligo.

Between now and then and inclusive of 25% penetration of Burns and soft tissue repair it really drive our growth and we will be investing in the organization to be able to take advantage of that opportunity. So I think you have just exactly right.

Got it okay perfect. Thank you so much thank you.

And thank you.

And one moment our next question.

And our next question comes from Ryan Zimmerman from <unk>. Your line is now open.

Hey, Jim Hey, Mike Thanks for taking our questions.

Wanted to ask about the domestic burn dining.

Dynamics a little bit.

Really encouraging to see I'm wondering if you could elaborate and maybe if aaron's on the call as well just around the interest and usage of resolved from a TB assay perspective.

This quarter.

Given what we've seen with other players in the space, who maybe had softer results I'm. Just curious if you feel like you're taking some share from maybe some of the larger burn cases that are out there.

Well Aaron side on the call, but I'll take the answer because I think I know.

We didn't see a downtick in burns admissions during the quarter.

And we did see the results of some other participants in the market.

Assessment, therefore that we are taking share in.

The GBS a different categories within the.

<unk> furniture categorize so.

The dynamic doesn't seem to have meaningfully changed from our view.

No.

It has to be therefore, our share of share gain.

I appreciate that color gentlemen, thank you.

And then as you think about the investments that you need to make in soft tissue in both the near and medium term.

Maybe you can elaborate a little bit more specifically on kind of given that it has three X the opportunity.

I don't know if that implies maybe three X the field force, but be curious to get some color about how you're thinking about ramping that commercial strategy.

Get feet on the street are just broader investments and how we should be thinking about it from a modeling perspective.

Yes, it's a great question I'll give you I think that answer on a rather high level I think in our February conference call I'll be able to give it to you in some detail.

Quite simply we're going to we're.

Market overlaps in the following manner level, one and two trauma centers on our soft tissue repair target.

They overlap about 50% with our current centers. So we will have.

Our need to invest in the organization that can reach that.

As additional level, one and two trauma centers and we will be doing that actually during the first half of.

Next year ahead of the anticipated approval in June so given that we have reimbursement already both inpatient.

DRG and also in an outpatient we intend to be able to be in a position to take advantage of of that reimbursement immediately in July of next year pending the approval by FDA.

So that is how we're thinking about it we're in the midst of planning it right now.

Finalizing our plans in the next 30 days and begin executing on that so I think when we were on the February call I will have some further detail for you.

Is that helpful.

Yes very helpful. Thank you for taking the questions Jim and Mike.

And thank you.

And if you have a question that is star one one again, if you would like to ask a question that is star one one and one moment our next question.

And our next question comes from Joshua Jennings from Cowen. Your line is now open.

Hi, good evening, Thanks for taking the question Jim.

Jim and Michael hoping to just ask about the.

The data verification, we analysis of the.

Co primary endpoint for the soft tissue trials, just any other details you can share what catalyzed the re analysis and the data verification process.

Is this standard fare and then any any help just interpreting what the.

The new.

Statistical significant not in PRT result encompassed.

Sure and actually it's a great question, if you'll recall our initial.

Top line readout was really quite good on its own notwithstanding it didn't meet the predetermined endpoint.

We did what you do always in this type of study, which as you review this.

Due to a 100% review of the source endpoint data against the clinical database to make sure that when you submit habit right subject to an FDA examination of the same data that you don't want to have any errors during the process to two subjects were updated.

One had a data entry error and one subjects should have been excluded from the analysis that they had surgery.

To remove a medication implants.

It was right in the resale wound and interfered with the helo. So that is really just those two patients and it was really part of the standard.

Endpoint data review.

No. That's helpful. Thanks for sharing those details in just thinking about the soft tissue opportunity in front of approval.

There is some off label use.

We now have data.

It supports the indication, but just not a regulatory approval.

Any any help just thinking about the level of off label use for soft tissue.

Indication currently.

Yes.

When the publication could be made that could catalyze more off label use even though July launch timeframe that you've provided.

Yes.

Great question. So first of all of course, we won't be promoting off label during the set that contract. During this timeframe one of the benefits, though we get from an early preparation of the sales team is there are burns cases that show up in level, one and two trauma centers that are not required to be treated and at Bernstein. So well.

Start getting some benefit from that during I would estimate in Q2 and again. This is one of those things.

Be updating you in the February conference call, but.

I think that we're going to be staying focused on getting prepared for that June June .

Expected approval and launch in July that would follow and in the meantime, we'll be training our organization getting them ready they will have the opportunity in those other centers to pick up some additional sales from the burn set enter level one level two trauma centers. So.

That's the best characterization I can come to at this moment.

Understood. Thank you for that and maybe one more sorry about this but just thinking about off label use and you now have.

Data set and stable vitiligo.

There isn't melanocyte care tenants, a transplant procedure thats being performed.

Do you suspect that some terms will want to get their hands on a resale system and.

Start performing.

Melanocyte transplant procedures with the retail system in front of us.

Approval or even front of reimbursement thanks a lot.

Couple of different questions, So I'll try and break it up.

Don't have an expectation that we will be promoting or placing.

Resell in terms officers between now and approve I don't anticipate that.

We do anticipate some cash pay post approval and we do anticipate supporting some.

Clinical workflows.

Best response, Investor initiatives initiated itself as well as some work we're going to do ourselves so.

There will be activity in that respect, but not I don't think will be up.

Communicating are significant.

Upward guidance as a consequence, so I think we'll see during the period before.

Before approval for soft tissue.

It is it is it is physicians can choose to do.

<unk> re sell for grafting need but at the same time it won't be a consequence of our promotion.

Thank you.

I appreciate it.

Thank you.

And one moment our next question.

And our next question comes from Matt of line Williams from Wilson. Your line is now open.

Hi, Thanks for taking my question.

I just wanted to kick.

Obviously with retail and <unk>, obviously been out a bit without a pretty successful sales force.

Pretty good productivity there I'm not sure. If this was mentioned, but just wanting to understand what your expectations of the sales force going forward and then.

Spending extending that soft tissue and potentially that will I go down the line.

In order to become commercial.

<unk>.

I believe the sales, let's say, it's around 30 at the moment.

Yes again.

Good question.

I'll break it into a few pieces if you don't mind.

No.

The field forces around 30, which includes both field support for cases, as well as direct salespeople and so youre approximately or approximately right in that particular number.

The opportunity in soft tissue is.

As I mentioned in the order of three X larger than that with borrowings both and call points.

Hospitals and market size, and so to really get after that it's necessary to invest in our sales.

Expansion that will.

At least cover the.

The large volume centers throughout the United States, which we will be doing.

And as I mentioned earlier ill characterize that I think a little bit more detail in the Q1 call that we do in February Q1 extra day.

22 call so the.

I think youll see that that investment that characterized at that time. Our current early thinking is that we'd be having a dose that's an investment.

So to speak reality during the Q2 period and we will.

Provide some further guidance on that.

Yes.

Doug It's part of your question Mark.

Yes, Thanks, that's all for me.

Thanks Melanie.

Thank you.

And I am showing no further questions I would now like to turn the call back over to Jim Corbett CEO for closing remarks.

Well. Thank you very much we're really feeling very excited about the progress we made this quarter and we're looking forward further to our submissions.

<unk> and soft tissue here in December and the next month or so so this is really setting the pace for our our increase.

Rate of growth that we expect in 2023, and 'twenty four and I'm looking forward to sharing that with you in February call. So thank you all for attending and I look forward to speaking with you more.

At that time.

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

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Okay.

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Good day, and thank you for standing by and welcome to Davita Medical third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jim Corbett CEO . Please go ahead.

Thank you operator, welcome to our BD medical third quarter 2022 earnings call. Joining me on today's call are Jim Corbett, Chief Executive Officer, and Michael <unk>, Chief Financial Officer. This call will include forward looking statements within the meaning of the private Securities Litigation Reform Act.

1995.

All statements made on this call that did not relate to matters of historical fact should be.

Forward looking statements, including statements regarding the markets in which would be the medical operate trends demands and expectations for its products and technology, It's expected financial performance expenses and position in the market and the impact of COVID-19 on its operations and its customers operations.

Please review, our beta medical and most recent filings with the SEC, particularly the risk factors described in the beta Medicals F. Three and 10-K filings and then Davita Medical <unk> quarterly report on Form 10-Q for the third quarter ended September 32022 for additional information.

Any forward looking statements provided during this call, including projections for future performance are based on management's expectations as of today have.

Davita medical undertakes no obligation to update these statements except as required by applicable law.

Davita Medical press release, the third quarter 2022 result is available on its website www dot Davita medical Dot com under the investors section and includes additional details about our financial results.

Davita medical website also at the latest SEC filings, which you're encouraged to review.

A recording of today's call will be available on Davita medical website by five P. M Pacific time today.

Now, it's my pleasure to introduce you to Jim Corbett, Jim is a five time life Sciences' CEO with over 30 years of experience, leading global commercial stage companies.

Deep expertise spans across many medical specialties on technologies with vast technical experience in the medical device industry.

Thank you Caroline and good afternoon, everyone and thank you for joining us today before I Express how excited I am to be here I want to take a moment to thank and recognize Dr. Mike Perry.

Mike Perry served as CEO for the past five years, and we are grateful to enforce important contributions during his tenure.

I'm often asked what about Davita attracted me to come and join the team.

As in Nevada Board member for the past five quarters have become very familiar with the business and its challenges and opportunities.

What I saw was a transformative technology, there's already brought hope to thousands of patients.

And an opportunity to work with a great team to bring this technology to thousands more.

To illustrate that I would like to share with you a recent patient journey, which has inspired me and the team of Davita.

Charlie and Xavier was working on a project at our family's brewery in Virginia, when a life life changing accident, and Gulfstream flames, causing third degree burns to over 85% of our bodies.

At the VCU, Evan Hanesbrands Center enrichment, she was given a slim chance of survival with the expectation of a 12 month stay in the ICU.

Instead, Joanne left the hospital nine days shy of six months.

What's your husband credits resale is a significant part of our successful recovery.

Charlie Anne and her during husband Andre are now focused on giving back by providing hope to anyone suffering from.

From a traumatic brain injury.

Thank you Charlie and Andre for sharing your story of tragedy and triumph. This is the kind of life changing impact. We saw continues to provide other patients and one of the main reasons I am thrilled to have the opportunity to join a beta.

This story and others, we have related truly demonstrates the importance of our burn work.

Now I'd like to take a moment to discuss the initial priorities that I have been focusing on during my first 100 days as CEO .

First developing the commercial plans for burns and soft tissue repair to drive our growth and preparing to execute on that plan.

Secondly.

The FDA submissions for soft tissue repair and vitiligo are expected during December 2022 with approvals expected in June 2023.

Just last week, the FDA informed us that the resale system has been granted breakthrough device designation for both the soft tissue repair submission and the vitiligo submission.

The breakthrough devices program facilitates active interaction with the FDA and prioritizes. The review of subsequent regulatory submissions, including our submission is expected in December .

Finally, the automation of the resale device for the soft tissue repair and Burns program, which will be followed by an automated device for vitiligo.

Our growth for the next 24 to 36 months will be driven by the burns in soft tissue repair markets.

The soft tissue repair market will expand our hospital call point and treating physician call points by nearly three times.

This expansion of market opportunity as the foremost commercial priority of the company.

The vitiligo program will be focusing on achieving reimbursement supporting early commercial cases, and clinical development in support of those initiatives, which we believe we will accomplish by Q1 2025.

Now, let me discuss our Q3 results.

We had a strong topline revenue performance with $9 million in commercial revenue in Q3 2022.

Which is a 30% increase over the same period, the prior year and a 9% increase on a consecutive quarter basis.

Keep in mind that commercial revenue includes all global revenue and excludes the $1 million in BARDA revenue booked in the quarter.

I also have a Japanese market update.

In early September the Ministry of Health Labor and welfare, commonly known as <unk>.

We of course share that revenue with cosmetic and customer reimbursement prices slightly higher than our current pricing in the U S of which a vida received 40% from our partner cosmetic.

Cosmic <unk> is preparing to launch we saw and we have received an initial stocking order of $555000 from cosmetic in September .

As a point of note other than U S revenue, we do not intend to release country specific revenues in the future unless there's some unusual event that causes us to do so.

Let me provide an update on our ease of use product.

<unk> started selling the ease of use device in Q1 to our larger accounts, which has been well received by our customers. One of the reasons customers prefer this version of resell the streamlines the workflow mitigates the SaaS staffing shortage and reduces the training efforts that both the customer and davita team need to perform.

We plan to expand the availability of our ease of use product in the upcoming quarters.

And the ability to leverage and expand our current salesforce, one clear upside in prioritizing soft tissue repair is that we will have immediate reimbursement. While burns is primarily inpatient. We also have outpatient reimbursement through our transitional pass through code with our soft tissue repair indications, we find the majority of patients and level one.

Two trauma centers being treated in the outpatient setting.

Thus, we have been educating our burns customers' customers on how to utilize these codes correctly.

Further approximately 50% of our current burn centers overlap into level, one and two trauma centers. Thus we gained significant leverage from the sales organization as we expand in the coming year.

Earlier this year, we released the topline results for our soft tissue repair shop.

The study had two co primary endpoints.

Endpoint had a hypothesis of superiority or donor skin sparing and the other co primary endpoints at a hypothesis of non inferiority for healing base.

Based on Airways comparisons, where each subject received both resale treatment and standard of care treatment as the study control I am pleased to report that both co primary endpoints have been met for both donor experience superiority and non inferiority healing for resale in soft tissue repair and.

And our initial analysis healing endpoint for resale versus control did not reach pre specified statistical non inferiority. However, after data re verification and associated corrections and updated analysis has revealed that the healing endpoint has been met.

Now, let's spend a few minutes on vitiligo.

For those of you who might be new to Davita vitiligo is a chronic autoimmune disease that attacks pigment producing cells, resulting in spots are patches of lighter weight.

Pigmented skin, although not non threatening non life threatening it can occur.

Where on the body and can result in severe psychological duboeuf patients due to perceived disfigurement.

Today, <unk> affects up to 2% of the population worldwide, including an estimated $6 5 million Americans in September we announced results from our pivotal clinical trial.

Evaluating the safety and effectiveness of the resale system for re pigmentation of stable vitiligo lesions, we met our primary endpoint in this trial.

Let me share a little bit about that influence. It is unique as there has never been a trial that effectively treat vitiligo with cellular transplantation.

The study compared success rates and a design, where each patient randomly received resale treatment in one portion of the Depigmented area. The.

The study control was the standard of care narrow band Ultra Violet be phototherapy, which is typical first line treatment for vitiligo.

Re pigmentation was evaluate six months after treatment by an expert Central Review Committee CRC, the CRC reported 56% of resale treatments versus 12% of controlled treatments resulted in repeat re pigmentation of more than 50% of the treated area.

The CRC also reported <unk>.

36% of resale treatments versus zero <unk>.

Percent of controlled treatments resulted in re pigmentation of at least 80% of the treated area, establishing super superiority for the primary endpoint.

We've had an opportunity to review this data with our medical advisers. The response was enthusiastic, particularly because they have no treatment that achieved this result in six months.

These are the first results from our U S randomized controlled trial of the resale system in treating patients with segmental and non segmental stable that legal.

And provide a foundation for communicating favorable clinical benefit.

We intend to submit to the FDA for this indication in December of this year with approval expected in June 2023.

We're tremendously excited about the pending submission and subsequent approval on June 23.

Going forward, we will be working with private payers and CMS to establish reimbursement for the vitiligo resale treatment.

Currently we believe we can achieve this by January 2025.

For <unk>, we will keep you current with our progress on automation clinical development and reimbursement.

Finally, I'd like to take a moment to emphasize the growth drivers for 2023.

We're planning a full and immediate launch into the soft tissue repair market in July 2023, following the expected FDA approval in June 2023.

We plan to hit the ground running at launch with an expanded field force in place as well as with commercial support resources and programs.

With that I'd like to turn it over to Michael holder Chief Financial Officer.

Thank you Jim.

Our commercial revenue, which excludes BARDA revenue increased by 30% or $2 1 million to $9 million.

$9 million in the three months ended September 32022.

Compared to $6 9 million in the corresponding period in the prior year.

Total revenue, which includes BARDA revenue increased 30% or $2, one to two to $9 1 million compared to $7 million.

The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the commencement of commercial sales with our partner cosmetic and Japan.

Gross profit margin decreased by 2% to 83% compared to the corresponding period in the prior year.

Total operating expenses increased by 16% or $2 million to $14 2 million compared to $12 3 million in the corresponding period in the prior year.

Higher compensation costs were primarily a result of an expansion of our commercial team.

Along with an increase in commissions, which resulted from an increase in commercial revenues.

In addition, we incurred severance costs in the current quarter associated with the termination of our former executive employee.

Higher pre commercialization costs were driven by activities related to future resell watches and soft tissue repair and <unk>.

Increased research and development expenses resulted from ongoing development of next generation devices for more automated preparation of spray on skin cells.

Share based compensation expense was lower in the current period as certain performance milestones were met in the prior period.

And there was a reversal in the current period of previously recognized expense for Unvested awards related to the termination of an executive officer.

Net loss decreased by 6% or <unk> 4 million to $5 6 million or <unk> 22 per share compared to a net loss of $5 9 million or 24 per share in the corresponding period of the prior year.

Adjusted EBITDA loss increased by 2% or $84000 to $4 million compared to a loss of $3 9 million in the corresponding period in the prior year a.

A table reconciling non-GAAP measures is included in the related press release for reference.

Turning to guidance full year 2022, commercial revenue guidance is revised and increased to a range of $33 million to $34 million.

$30 million, excluding BARDA revenues, which represents an approximate 33% increase year over year.

We continue to project BARDA revenues of approximately <unk> 3 million in calendar year 2022.

With that we thank you for your attention and now I will turn the call back over to the operator for your questions.

And thank you.

As a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

One moment for your first question.

And our first question comes from Brooks O'neil from Lake Street Capital. Your line is now open.

Hi, This is Charlie monitor hang on for Brooks O'neil. Thanks for taking my question.

My first question is how will the fast track designation is change the way you guys approach the soft tissue and vitiligo.

Thanks, Charlie This is Jim since it's my first time talking to speaking with you.

The.

The principal contribution.

<unk>.

Designation gives us is it.

It causes for essentially a very dynamic and real time review process within our prioritization with FDA.

Number one benefit that we will enjoy with both submissions.

Soft tissue and the lidar.

It also will help US later as we develop reimbursement for vitiligo. So those are the two principal benefit of that designation.

Okay. Thank you thanks for that clarity and then my next question is.

As the hospital environment return to normal and if it's in that kind of where.

Are we and where do you think.

Or do you see the.

Hospital environment over this winter.

Well overall.

The hostile environments return to a place where we have good access in terms of our selling time.

And very good access in terms of our support of.

Physicians and their staffs in terms of training as well as supporting cases, so we actually are not heavily impacted by the hospital environment, We do see.

There is some.

Staffing shortages, which causes us to have to do a little bit more training with the SaaS net users of course, selling time to do that but I wouldn't characterize it as a dominant or significant.

Challenge for us in the current time as we see it.

Okay, great. Thanks, that's it for me.

Thank you Jonathan and thank you.

And one moment our next question.

And our next question comes from Matthew O'brien from Piper Sandler Your line is now open.

Afternoon. Thanks for taking my question. So I just wanted to make sure we tease out what what Youre getting from Japan versus the increase in guidance I think you said, Jim $5 55 here in Q3.

You're going to get some more.

From cognate tech in Q4 as far as a bulk order and then I guess just to kind of wrap up the question. If it's at about $1 million and you have a $2 million increase in the guide. So so clearly the fundamentals are picking up can you just talked about what that is.

In terms of share taking or our penetration of existing accounts versus new accounts that you're onboarding.

Thanks, Matt well, let me take those in order.

With respect to Japan, you are right the initial stocking and it was $555000.

And we do not yet have a clear view on the pace of the launch although there was a quite a number of cases performed in last 30 days. So we know that they are active and they're consuming that that initial stocking order.

We are expecting that during the next quarter, we will get some visibility on the coming year and when we get that we're going to.

Communicate that to you and the rest of the market.

The.

In terms of our core.

We see added during many of new accounts because of course, as you know <unk> market somewhere $1 $41 50.

Burn centers in the United States. So our uptick in revenue is reflective of increased penetration.

So we are getting increased penetration in a broader abuse by surgeons, so and we expect that to continue we as part of our soft tissue repair initiative over the next six months, we will be increasing the.

Coverage profile of our.

Salesforce, where they have time to be deeper in the accounts, which is where the action is of course.

Got it okay. So just to be clear only 500000 of the $3 $5 million increase for the year is is from Japan, So the $3 million.

$3 million as domestic that's correct 555, okay.

Got it got it okay, sorry, I'm using round numbers to make it easy.

And then the second one is I don't want to get individual I go too much because you've got a lot of opportunity on the burn and soft tissue side, but I just wanted to make sure that the message is clear here.

We're still very bullish on the vitiligo I don't want to put more than your mouth, but it seems like you are still very bullish on the opportunity, but just given your resources and the opportunity.

For soft tissue plus burn that's the focus now do a lot more work to get reimbursement in place and have another growth driver of a big market.

25% and in the back half of the decade is that the right way to view it.

Yes, I think so when you look at <unk> first of all our results have been.

<unk> received fantastically enthusiastically by our medical advisors.

There is no such treatment for these patients that achieved the result that we achieved in our trial. So we're extremely bullish on it that said, we need to get reimbursement sorted out and that will take a little bit of time, we estimate that right now I've had a chance really to get into that strategy and I have a fair bit of experience in.

Reimbursement.

And that January 25, right now our plan looks as though that.

When we succeed at that and.

And that will of course drive 25 forward with vitiligo.

<unk> now and then and inclusive of 25% penetration of Burns and soft tissue repair it really drive our growth and we will be investing in.

And the organization to be able to take advantage of that opportunity. So I think you haven't just exactly right.

Got it okay perfect. Thank you so much thank you.

And thank you.

And one moment our next question.

And our next question comes from Ryan Zimmerman from <unk>.

Your line is now open.

Hey, Jim Hey, Mike Thanks for taking our questions.

I wanted to ask about the domestic burn.

Dynamics a little bit.

Really encouraging to see I was wondering if you could elaborate and maybe as aaron's on the call as well just around the interest and usage of resell from a TB assay perspective.

This quarter.

Given what we've seen with other players in the space, who maybe had softer results I'm. Just curious if you feel like you are taking some share from maybe some of the larger burn cases that are out there.

Well Aaron side on the call, but I'll take the answer because I think I know.

We didn't see a downtick in burns admissions during the quarter.

And we did see the results of some other participants in the market it's arent.

Assessment, therefore that we are taking share in.

The GBS a different categories within the.

Furniture categorize so.

The dynamic doesn't seem to have meaningfully changed from our view.

So.

It has to be therefore, our share of share gain.

I appreciate that color gentlemen, thank you.

And then as you think about the investments that you need to make in soft tissue in both the near and medium term.

Maybe you can elaborate a little bit more specifically on kind of given that it has three X the opportunity.

I don't know if that implies maybe three X the field force, but be curious to get some color about how you're thinking about ramping that commercial strategy.

Feet on the street are just broader investments and how we should be thinking about it from a modeling perspective.

Yes, it's a great question I'll give you I think that answer on a rather high level I think in our February conference call will be able to give it to you in some detail.

Quite simply we're going to we're.

Market overlaps in the following manner level, one and two trauma centers on our soft tissue repair target.

Overlap about 50% with our current centers. So we will have.

Our need to invest in the organization that can reach those additional level, one and two trauma centers and we will be doing that actually during the first half of.

Next year ahead of the anticipated approval in June so given that we have reimbursement already both inpatient.

DRG and also outpatient we intend to be able to be in a position to take advantage of.

That reimbursement immediately in July of next year pending approval by the FDA. So that is how we're thinking about it we're in the midst of planning it right now we are finalizing.

Our plans in the next 30 days and begin executing on that so I think when we were on the February call I will have some further detail for you.

Helpful.

Yes very helpful. Thank you for taking the questions Jim and Mike.

And thank you.

And if you have a question that is star one one again, if you would like to ask a question that is star one one and one moment our next question.

And our next question comes from Joshua Jennings from Cowen. Your line is now open.

Hi, good evening, thanks for taking the questions.

Chairman, Michael hoping to just ask about the data verification we analysis.

Co primary endpoint for the soft tissue trial, just any other details you can share what catalyzed the re analysis data verification process.

Is this standard fare and then any any help just interpreting what the.

The new.

Statistical significant not in PR result encompassed.

Sure actually its great question, if you'll recall our initial.

Top line readout was really quite good on its own notwithstanding it didn't meet the predetermined endpoint.

We did what you do always in this type of study which used to review this.

One had a data entry error and one subjects should have been excluded from the analysis that they had surgery to.

To remove a medication implants.

It was right in the resale wound and interfered with the helix. So that is really just those two patients and it was really part of the standard.

Endpoint data review.

No. That's helpful. Thanks for sharing those details in just thinking about the soft tissue opportunity in front of approval.

There is some off label use.

We now have data.

It supports the indication, but just not a regulatory approval.

Any help just thinking about the level of off label use for soft tissue.

Indication currently.

<unk>.

When the publication could be made that could catalyze more off label use even though July launch timeframe that you've provided.

Yes.

Really great question. So first of all of course, we won't be promoting off label during the set that contract. During this timeframe one of the benefits, though we get from an early preparation of the sales team is there are burns cases that show up in level, one and two trauma centers that are not required to be treated and at Bernstein. So well.

Start getting some benefit from that during I would estimate in Q2 and again. This is one of those things.

Be updating you in the February conference call, but.

I think that we're going to be staying focused on getting prepared for that June June .

Expected approval and launch in July that would follow and in the meantime, we will be training our organization getting them ready they will have the opportunity in those other centers to pick up some additional sales from the burn set enter level one level two trauma centers. So.

That's the best characterization I can come to at this moment.

Understood. Thank you for that and maybe one more sorry about this.

Just thinking about off label use and you now have.

Data set and stable vitiligo.

There isn't the lymphocyte care tenants, a transplant procedure thats being performed.

Do you suspect that some terms will want to get their hands on a resale system.

Start performing.

Melanocyte transplant procedures with the retail system in front of.

Approval or even front of reimbursement thanks a lot.

Couple of different questions, So I'll try and break it up.

Don't have an expectation that we will be promoting or placing.

Our result in terms of just between now and approve I don't anticipate that.

We do anticipate some cash pay post approval and we do anticipate supporting some.

Clinical workflows.

Investors spot investor initiate initiated itself as well as some work we're going to do ourselves. So there will be activity in that respect, but not I don't think will be up.

Communicating are significant.

Upward guidance as a consequence, so I think we'll see during the period before.

Before approval for soft tissue.

It is it is it is physicians can choose to do.

Juice resell for progressing needs, but at the same time it won't be a consequence of our promotion.

Thanks Blake.

I appreciate it.

Thank you and thank you.

And one moment our next question.

And our next question comes from Matt <unk> from Wilson. Your line is now open.

Hi, Thanks, Thanks for taking my question.

I just wanted to kick.

Obviously with retail and <unk>, obviously been out a bit without a pretty successful salesforce and generate pretty good productivity. There I'm not sure. If this was mentioned, but just wanting to understand what your expectations are for the Salesforce going forward and then.

Expanding extending that soft tissue and potentially that will I go down the line.

Become commercial.

Sandy.

I believe the sales, let's say, it's around 30 at the moment.

Yes again.

Good question.

Break it into a few pieces if you don't mind.

So the the field forces around 30, which includes both field support for cases as well as direct salespeople.

Youre approximately or approximately right in that particular number.

The opportunity in soft tissue is.

As I mentioned in the order of three X larger than that with borrowings both and call points.

Hospitals and market size, and so to really get after that it's necessary to invest in our sales.

Expansion that will.

At least cover the.

The large volume centers throughout the United States, which we will be doing.

And as I mentioned earlier ill characterize that I think a little bit more detail in the Q1 call that we do in February Q1 extra day.

22 call so.

I think youll see that that investment that characterized at that time. Our current early thinking is that we'd be having a dose that's an investment.

Come <unk>.

So to speak reality during the Q2 period and we will.

To provide some further guidance on that.

Yes.

Doug it's quarter question Mark.

Thanks, that's all for me.

Thanks, Melanie and thank you.

And I am showing no further questions I would now like to turn the call back over to Jim Corbett CEO for closing remarks.

Well, thank you very much.

Really feeling very excited about the progress we made this quarter and we're looking forward further to our submissions for vitiligo and soft tissue here in December and the next month or so so this is really setting the pace for our our increased rate of growth that we expect in 2023 and 'twenty four and I'm looking for.

Sharing that with you in February call. So thank you all for attending.

I look forward to speaking with you more at the top at that time.

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

Q3 2022 AVITA Medical Inc Earnings Call

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