Q4 2022 AVITA Medical Inc Earnings Call

February 23, 2023

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

[music].

Good day, and thank you for standing by welcome to the a beta medical fourth 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.

Let's start one one on your telephone you will then hear an automated message advising your hand is raised to work.

Draw your question Press Star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Caroline corner.

Okay.

Please go ahead.

Thank you operator, welcome to our BD medical fourth quarter 2022 earnings call before we begin let me remind you that 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 do not relate to <unk>.

Matters of historical facts should be considered forward looking statements, including statements regarding the markets in which would be the medical operates trend demand and expectations for its products and technology, It's expected financial performance expenses our position in the market.

These statements are neither promises nor 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.

Please review our beta medical most recent filings with the SEC, particularly as the risks described in our beta Medical's annual report on Form 10-K for the year ended December 31 2022.

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

It'd be the medical press release with fourth quarter of 2022 results is available on its website www dot Davita medical Dot com under the investors section and includes additional details about our financial results.

The medical website bulk of it is the latest SEC filings, which you are encouraged to review the recording of today's call will be available on our BD Medical's website by five PM Pacific time today.

Joining me on today's call are Jim Corbett, Chief Executive Officer, and Sean <unk> acting Chief Financial Officer, I will now turn the call over to Jim for his comments.

Thank you Caroline.

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

I will begin today's call by discussing highlights for the fourth quarter and full year as well as our expectations and guidance for 2023.

Sean will then provide more detailed commentary on our financial performance before opening the call to Q&A.

To begin with we had a strong topline commercial revenue performance with $9 4 million in Q4 2022.

Which is a 37% increase over the same period in the prior year.

For the full year 2022, our commercial revenue was $34 1 million, which was a 36% increase over the prior year.

As a reminder, commercial revenue includes all global revenue and excludes the $100000 BARDA revenue recognized in the quarter and.

$400000 for the year.

I'd like to personally congratulate our field sales team for their successful 2022.

Okay.

I'd like to provide an update on the initial priorities I discussed on our third quarter call.

With respect to our two pending applications with the FDA.

Our PMA supplement for soft tissue was submitted on the 19th of December and our PMA application for vitiligo, which submitted on the 16th.

Both submissions independently have breakthrough device designation as such we have expedited review for both programs, which have each met or exceeded the primary endpoints in their respective studies used to support the applications.

180 day review cycle would imply June approvals.

Notably the soft tissue, PMA supplement, which significantly broadened our existing firms market and allow us to leverage our existing burns infrastructure.

Our team has developed the commercial plans to maximize the soft tissue opportunity and to drive synergies between burns and soft tissue repair, which will drive our growth over the next three plus years.

Synergies are significant and important.

First soft tissue repair utilizes the same inpatient reimbursement and outpatient coaches burns as such both in hospital reimbursement through a DRG and outpatient reimbursement through a transitional pass through code will be effective immediately upon FDA approval for soft tissue indications.

Second of the nearly 150 burn centers that we're presently approved to sell in <unk>.

<unk> half are also either level, one or level two trauma centers.

Which means that these hospitals will have immediate access to the expanded label upon approval.

Additionally, we will be adding approximately 1000 hospital call points that our level, one and level two trauma centers to our current 150 or so hospital call points.

Third within the U S inpatient burn market, we're configured to only call on the U S burn centers, where 70% of the resell eligible cases are treated.

The expansion into level, one and level two trauma centers positions, our sales force to capture the remaining 30% of the burn market.

In the second quarter, we will begin calling on these trauma centers.

We'll use this opportunity to begin promoting resell for burns and these level, one and level two trauma centers and begin seeking value analysis committee approval that will allow for a more rapid soft tissue repair launch in July .

Together these synergies offer us a unique opportunity to prepare for the full commercial launch of soft tissue on July one 2023.

As we should have immediate access to our expanded indications and vac approvals and many of these hospitals already upon PMA supplement approval.

Further during the second quarter, we will initiate the planned expansion of our U S field sales organization.

Currently we have 30 field salespeople that we will be expanding to approximately 70 field salespeople, which includes both direct sales and clinical roles.

This is ahead of the expected June approval of our PMA supplement for soft tissue repair such that the team is in place and trained at launch. This will result in a peak operating expense as a percent of revenue in Q3 2023.

I emphasize that our contribution margin on new field sales professional is breakeven with approximately five resell kits sold per month per individual.

Currently the average productivity of a direct sales rep exceeds 20 kits per month.

This is what I would like to call weaponized, our gross profit to enhanced market adoption and penetration where the sales force expansion pays for itself quickly.

For the vitiligo indication, we expect PMA approval in June 2023, as well we are in process of pursuing in office reimbursement through the MAA CPT code process.

Our goal to secure Medicare reimbursement by January 2025 during.

During the interim period, we will be implementing cash pay for vitiligo patients and physician sponsored studies to build our podium presence for an intended commercial launch in January 2025.

During our last call I also committed to providing an update on our automation program.

By way of background currently the disaggregation of cells from the autologous sample is done manually and requires frequent training by our field sales team.

Our automation devices designed to automate that disaggregation, which will require less training by our sales team and operating room staff and will allow us to better leverage selling time by our field organization.

We plan to submit our PMA supplement application to the FDA by June 30 of this year.

Just like with soft tissue, we will be subject to the 180 day review cycle and we are project approval by January 2024.

As reported in Q4, we have begun our launch in Japan through our partner cosmetic.

Early returns are very positive.

These sales are recognized in U S dollars and we will report Japan revenues in our footnotes in the foreign revenue line.

During 2023, we expect that Japan will account for over 90% of those international revenues.

With respect to our broader international strategy. It remains on our agenda to communicate our strategy during the November Q3 earnings call.

With respect to 2023 guidance as communicated we will be providing updated annual and quarterly guidance every quarter.

Our annual revenue guidance for 2023 is expected to be in the range of $49 million to $51 million.

Which would be at midpoint of guidance, 47% growth over 2022.

For the first quarter.

Of 2023.

We expect commercial revenues to be between $10 million and $11 million at the midpoint of this guidance.

Would be up over 40% over the prior year.

As I have outlined 2023 will be the year of inflection for a review of the medical transforming our business to encompass multiple indications and dramatically expanding our growth trajectory.

Our regulatory and commercial teams are making great strides and I look forward to updating you on our progress on future calls with that I'd like to turn it over to Sean <unk> acting Chief Financial Officer.

Thank you Jim.

In the three months ended December 31, 2022, our commercial revenue, which excludes BARDA revenue increased by 37% to $9 4 million compared to $6 8 million in the same period in 2021.

Total revenue, which includes BARDA revenue increased by 36% to $9 5 million compared to $6 9 million in the same period in 2021.

Gross profit margin was 86% compared to 88% for the fourth quarter of 2021.

Total operating expenses for the quarter increased by 2% to $15 million compared to $14 8 million in the same period in 2021.

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

Higher selling costs are attributable to increased commissions travel costs.

Many events associated with increased sales activity.

Increased pre commercialization costs are driven by.

Activities related future retail launches in soft tissue repair in vitiligo.

Higher salaries and benefits are driven by the expansion of our workforce to support the overall operation.

Research and development costs were lower due to the following.

The pediatric burn study was closed for enrollment.

Tissue repair in vitiligo trial participants were in a less costly follow up phases. This period compared to more coffee recruitment and treatment phases in the prior period.

Along with lower trenches for sponsored research agreements toward pipeline development.

In addition, we had lower development expenses in the current year from ongoing development of next generation devices for automated preparation of spray on skin cells. As we are currently in lower cost project phase compared to the prior year.

Share based compensation expenses were lower due to a reversal in the current period of a previously recognized expense for Unvested awards related to the termination of a former executive officer.

Net loss decreased by 37% to $5 4 million or 21 per share compared to a net loss of $8 5 million or <unk> 34 per share in the same period in 2021.

Adjusted EBITDA loss decreased by 39% to $4 million compared to a loss of $6 5 million in the same period in 2021.

For the full year ended December 31, 2022, our commercial revenue increased by 36% to $34 1 million compared to $25 1 million in the same period in 2021.

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 <unk> in Japan.

Total revenue increased by 4% to $34 4 million compared to $33 million in the same period in 2021.

Gross profit margin was 82% relatively flat compared to the same period in 2021.

Total operating expenses increased by 10% to $59 1 million compared to $53 6 million in the same period in 2021.

The increase in operating expenses is attributable to higher salaries and benefits pre commercialization cost.

Selling costs share based compensation expenses, partially offset by lower research and development expenses.

Higher salaries and benefits were primary a result of the expansion of our commercial team along with an increase in our workforce to support the over operations.

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

Higher pre commercialization costs are driven by activities related to future retail launches in soft tissue repair and vitiligo.

Higher selling costs are attributable to increased commissions travel costs and training events due to increased sales activity.

Share based compensation expenses were higher in the current year driven by new equity grants, partially offset by a reversal of a previously recognized expense from vested awards related to termination of our former executive officer.

Research and development costs were lower due to the following.

The pediatric burn study was closed for enrollment soft tissue repair in vitiligo trial for expense.

And less costly follow up phases in this period compared to more costly recruitment and treatment phases in the prior period.

And a lower expense for sponsored research towards pipeline development in the current period.

This is partially offset by higher development expenses in the current year from ongoing development of next generation devices for an automated preparation of spray on skin cells as compared to the prior year due to early prototype development and testing.

Net loss was $26 7 million or $1 <unk> per share compared to a net loss of $25 1 million or $1 <unk> per share in the same period of 2021.

Adjusted EBITDA loss was $19 million compared to a loss of $18 1 million in the same period in 2021.

A table reconciling non-GAAP measures is included in today's press release for reference.

With that we thank you for your time and now I'll turn the call back to the operator for your questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question.

We'll need to press star one on your telephone and wait for your name to be in year two of <unk>.

Draw your question Press Star one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Joshua Jennings.

Your line is now open.

Thank you good afternoon.

Congrats on the strong finish to.

Confidence in the outlook.

On the call for the collection in 2023.

Jimmy Sean was hoping to ask about guidance.

Full year and first quarter to start.

Yes.

If there's any way you can maybe help us think through the year.

Your outlook for the core burn in business, we saw brand business.

<unk>.

And the growth you anticipate.

And then maybe any assumptions for soft tissue contributions.

For the full year and then for the first quarter just it's a nice sequential step up if you can just remind us about seasonality trends in the burn market in the United States.

Is there some seasonality tailwind or is this just momentum from Q4 carrying into these first two months of 'twenty three already and give me.

The confidence of tissue that nice sequential step up in Q1 and.

And it wouldn't follow.

Thanks, Josh that was a very distinct single question I'll, Let me take it on.

So.

So so first of all.

Regarding to burn business, let's start with that we saw sequential growth Q4 to Q1, clearly and that does not reflect seasonality I'll just give you some data.

If you look at claims data for the last three years by quarter contribution to the year and you average them the average the average.

<unk> admit that a resell eligible it sounded like this $25 $25 26 to 24 so.

Very minor changes between Q4, and Q3 and its one point in terms of annual admit so theres really not a seasonality.

The reality that we can define from the claims data. So what we are therefore seeing.

As growth in penetration so thats the.

First element I think to your question what.

We expect to see through the course of the year Q1, and Q2 has continued.

Adoption.

The number of users who use it multiple times per month, increasing as we as our evidence continues to grow the experience with burn surgeons continues to get validated in terms of tissue sparing.

And healing an early exit from the hospital, so it's really taking at.

Its course, and our field sales team has done a really terrific job.

What happens as we move in them staying on Burns for a second into the second half.

Depending on your math.

30% of the Burns market, which is about 10000 of the 35000 add minutes are in soft tissue repair and they are.

Excuse me.

Third of them are in level, one and two trauma centers.

Yes.

That 10000 cases, we have not been compared to call on.

So one of our expectations as we move through the year.

Is that adoption will will come our way because of course, our sales team will be calling on those physicians with the very strong accumulated evidence and commercial experience we've had.

Focusing only on burn centers. So that's that's a.

A really big driver for the year in the burn market.

We're feeling increasingly comfortable.

With our soft tissue repair PMA supplement in terms of timing, we are having a very productive interaction with the FDA were not getting some price surprises of any type and.

As you know are on the breakthrough device designation path.

And that is of course, giving us expedited.

Review and we don't stop the clock unless there's a material deficiency.

So that has caused us to bet so to speak on that June approval in July one readiness.

So with that readiness during Q2 were expanding as I mentioned, our field force from approximately 30% to 70.

During the second half will build increasing momentum in soft tissue repair it will have.

A curve associated with it.

For example, we will have.

Soft tissue repair indications available and vac approved and virtually half of the burn centers, which are level, one and level two.

Qualified.

We will also begin the vac process during Q2, and a number of level, one and two trauma centers using burns as our indication for that process.

It's a bit uncertain at the moment exactly how many we'll get through factor in Q2, which certainly we will have a running start and our sales team will be fully in place and trained for that July one launch.

So we will scale up during the second half and soft tissue and of course, what will really be exciting quite honestly is our exit rate in Q4, because it's going to really position us for high growth in 2024.

Thanks for walking us through that appreciated and just the follow up.

The build out of the sales team just was hoping to better understand.

We're recruiting these reps from.

And are there any challenges to getting to that 70 number in Q2, where do you feel like Thats, a pretty straight shot based on experience to date.

Thanks again for taking the questions.

Thanks, Josh it is.

A qualitative evaluation on my part, but I don't mind sharing with it.

First of all we have a very strong pipeline of candidates I think the success that <unk> been experiencing in the marketplace translate as well.

The.

Ending indications that we have.

And that are coming that translates well in terms of recruiting. The fact that we are well capitalized and have the capital to execute our growth strategy is very appreciated because a lot of companies don't have that so our early returns are that we're largely filled the management roles that we're expanding.

Into or have identified them.

We've begun interviewing salespeople.

We have a great pipeline of really high quality candidates. They are coming from a number of places, but it come from related wound care companies that come from med surge type backgrounds. So we want salespeople who are.

Experienced and comfortable in the LR and were finding really a strong pipeline of candidates. So we're quite confident that we're going to get our team in place and have adequate time to train them.

It is a big scale up for us in our commercial team is really stepping stepping into this one so it's really.

It kind of inspiring to watch them do it.

Excellent great to hear.

Okay. Thank you please standby for our next question.

Our next question comes from the line of Philip <unk> of Piper. Your line is now open.

Hi, This is bill on for Matt Thanks for taking our questions and congrats on the excellent quarter I guess just for starters on given the expected inflection here in 2023 in your commentary.

Durable either call it 45% growth in that 'twenty four 'twenty five timeframe and is it wrong to say that you're exiting 2023 at nearly 50% growth.

Yes, thanks, Phil.

First at mid point is 47% not 45 just.

To make a finer point of it.

Think that implies a greater than 50% exit rate in Q4, you are correct.

How durable do I think it is I think it's quite durable.

The exit rate will cause us to have to expand more into 2024 as well in terms of our commercial coverage. So I think we have some very strong growth years ahead of us with soft tissue and burns on their own not adding two either in international expansion.

Or a launch of the vitiligo.

In January 25.

That's really helpful and I guess, one more for me.

And given the rapid increase in the sales force here in Q2, what's cash burn expected to look like and how do you think about capitalization moving forward.

I appreciate the commentary that Opex should peak in Q3, but what should we be thinking about there.

Well, clearly, we're making an investment in market growth.

Ill go back to our 83% gross profit.

And and how we look at each of those investments contribution margin for.

A sales rep.

It's covered by five resells sales a month.

So for us that.

As from a looking at our burns experience each rep averages well over 20 per month.

So we do have an expectation about when they cross over and it is without getting precise about it because it does have variability. It's a number of months not a year that they will crossover.

So I think from a cash burn point of view, we feel quite comfortable for example.

Yeah.

Absent.

Investments in <unk> International we expect to end 24 with.

In excess of $30 million of cash so that will be after another expansion and another growth year. So we feel very comfortable with our capital position as it is today.

Awesome. Thank you so much.

You bet. Thank you.

Thank you please standby for our next question.

Our next question comes from the line of Ryan Zimmerman of BP IGD. Your line is now open.

Hi, This is Sam on for Ryan and Thank you for taking my questions. This next one is on the Japanese market and the partnership with cosmetic do you expect meaningful contributions from the Japanese market in 2023, and how should we think about that given the guidance. You've provided then I have a follow up as well. Thank you.

Well first of all our early returns in Japan are going well we've performed in the <unk>.

Territory or in excess of one hundreds of patients so far.

That said, we do not have enough experience with them that we're giving specific guidance on Japan. Although you will note that it is.

Even though there's a couple of hundred in the short time. It has been we do expect expect a strong performance from Japan, remembering that we recognized 40% of the selling price.

So on one hand, it's a very high gross profit operating profit type sale. It's also lower per case revenue, but lower expense.

Produce so I think in the coming quarter My objective and my conversations with cosmetic is to be in a place where we can project forward our expectations for Japan were just not quite ready to.

To express that in this moment.

Thank you that's very helpful. The next one is on the vitiligo you indicated that <unk> likely to still be approved in June of 2023 with insurance reimbursement established in January of 2025 can.

Can you provide us any updates on conversations you've had with insurance payers as you look to establish reimbursement for vitiligo. Thank you again.

Yes, you bet actually we've had no formal conversations with payers at this time they of course dedicate their time to products that are.

Ready for market and we are still a few months away from that our expectation is of course that.

What we're looking for is to establish resell.

As in office treatment.

Alternative.

So that is a process that is embedded in sort of the reimbursement world. So.

It's kind of a complex question to answer we Havent gone to private insurers yet will in fact go to CMS.

So that will happen.

Post later this year.

Thank you.

Okay. Thank you please standby for our net.

Sure.

Yes.

Our next question comes from the line of Brooks O'neil of Lake Street Capital markets. Your line is now open.

Well, thank you and good afternoon, everyone. I was hoping you might talk a little bit about what's your.

Patients are with regard to.

The.

The dynamics in the soft tissue market relative to your experience with large bird in terms of.

And a number of cases.

That resell might be appropriate for.

Let's say per week or per month.

In the centers youre going to attack.

How many kits per per case.

Some of those things would help us to get a good deal for sort of how you view the opportunity in soft tissue.

Yes, Thanks Brooks.

Let me try and work through that thought because theres a number of questions. I think you raised so first and foremost in soft tissue repair and reconstruction, which we the label.

We believe.

The cases themselves will utilize less resell kits per patient.

So in large burns is common for one or more kits to be used on patient wear and a soft tissue market that will happen.

Quite less often so thats I think the first part of your <unk>.

Question. The second is the number of patients to be treated.

It's in the order of Forex available resell.

Viable candidates relative to burns. So that is a really substantial increase and theres a lot of different applications that we will have access to with this broader indication. So in a level. One trauma Center for example, there's a wide range of things that Mike.

Patients that might present themselves for example.

There will be there will be burns patients, who present that will happen they won't be the large greater than 30% GBS, a burns, but there'll be smaller burns Nonetheless, new treatment will see necrotizing bacteria will see gloving, we'll see.

Abrasions will see acute wounds. So there's so many applications, which is on one hand, a great market opportunity. It requires on the other hand <unk>.

Extensive training and focus on our part of our sales team. So we really will be moving from the big accounts to the small.

And the reason of course is when you camp out in the Big accounts, you get access to all of those indications and we allow our FDA submission.

For automation is so to speak Cook at FDA, so that by the time, we're moving to smaller.

Smaller level, one and two trauma centers in January .

24, we expect to have our automation program launched and ready to go and improved.

So it's a.

There's going to be a constant evolution and are both.

Really to get Vac approvals, all the way to these broader indications too.

Starting to move into smaller level, one and two trauma centers and everything benefiting from the absolute adrenaline injection of automation, so automation will make our sales team so much more productive.

Okay, Great. That's really helpful. So let me just ask one more.

I'm very intrigued by the comment you made about well.

Getting to breakeven.

With five kids, Paul I think you said Bob.

Might have that wrong.

And.

The average being 'twenty kit.

Do you envision the dynamics.

Small soft tissue being the same.

<unk>.

And average sale and then being able to sell 20 kits or do you think they might be able to sell a lot more and kind of what's your expectation for how quickly.

People will get up to be average or better.

Okay perfect. So for clarification those metric I used.

Contribution margin for the cost of a rep is equivalent approximately to five resale kits.

And that our current.

The sales reps and burns only are averaging in excess of 20%. So just as a baseline thats, where we are so first question is do we expect that five to be the same for our expanded sales organization to answers yes.

It's the same when you're selling a virtually.

Virtually the same kit that is.

Sold at the same price. So therefore, we manufactured for the same so the 83% gross profit works still in that equation.

Do we think that the market opportunity to be greater than <unk> 20 per month per month exists actually very much. So we expect it.

<unk> is quite higher than that because of course the market.

<unk> patients.

That we are.

Treating our approximately Forex times the number that are in burns. So we think that opportunity is really rich now we have to execute but that's a big opportunity for us.

Think I got all your questions.

I Miss one no you did Jim Thanks, a lot.

It's a pretty <unk>.

Exciting opportunity and I can't wait to see it unfold.

Okay.

Thanks, Brooks me too.

As a reminder to ask a question you will need to press star one one onward telephone.

Our next question comes from the.

Mine.

Lyanne Harrison of Bank of America. Your line is now open.

Hi, good afternoon.

Just to follow up on Brooks question I have one more on that.

The ramp up takes with sales person.

Get from zero to five <unk>, a month and then from five kits.

'twenty kit demand what does that profile look like for the play.

This is looking at what the ramp up might be for soft tissue.

Yes. It is.

A really terrific question, we do have data on that.

<unk> fairly variable.

But on the front end of it it is a.

Less than a half a year.

And on the longer end is well under a year. So it's variable, but we know it's months, we know it's not years so.

Past set five pretty consistently in a.

Short number of months.

And then they get the fix more work in fact, when we were launching with Burns who is actually harder we were.

Less proven at that time.

And the market was narrower in terms of the indication we were pursuing.

So we actually are very optimistic about the equation that youre describing.

Like to give you a more precise answer but I can suffice to say it's months not a year.

I think that's probably as good.

As tight as I can make that interval at the moment.

No. That's that's very helpful. And then just to follow up a question of gross margins, obviously seeing slightly gross margin slightly down this quarter, but.

Over time, it has expanded significantly as volume increased.

Do you have an expectation on target gross margin of where you might end up at the end of financial 'twenty three.

Yes actually.

Our gross margin has some variability to it.

There are very we don't experience.

Price competition, but we have volume related discounts that come into play, particularly as you move through the end of the year. So that's one factor.

We've recently made some improvements thus note an hour.

Our manufacturing process.

Very specifically kind of in the Geek category. If you don't mind, but we had this process, where we had to ship what's called cold chain in a <unk>.

Package that control temperature.

And in the last few months.

Succeeded in establishing that data.

<unk> made that cold chain shipping not necessary and removed rather substantial cost that we will see going forward. So I think we feel very confident about two things our cost of goods improving.

And the stability of our average selling price were.

It is.

Mostly subject to volume discount versus price competition.

Thank you very much at all I had.

Okay.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Thank you very much.

The conference will begin shortly.

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

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Okay.

Good day and thank you for standing by welcome to the Davita Medical fourth 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.

Star one on your telephone you will then hear an automated message advising your hand is right.

Withdraw your question Press Star one again, please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your speaker today Caroline corner.

Please go ahead.

Thank you operator, welcome to our beta medical fourth quarter 2022 earnings call before we begin let me remind you that 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 do not relate.

Matters of historical facts should be considered forward looking statements, including statements regarding the markets in which Davita medical operates trend demand and expectations for its products and technology. It is expected financial performance expenses and position in the market. These statements are neither promises no guarantees and involve known and unknown risks and uncertainties that could cause actual results performed.

Our achievements to differ materially from any results performance or achievements expressed or implied by the forward looking statements.

Please review our beta medical most recent filings with the SEC, particularly as the risks described in the beta Medical's annual report on Form 10-K for the year ended December 31, 2022 for additional information.

Forward looking statements provided during this call, including projections for future performance are based on management's expectations as of today have Ada medical undertakes no obligation to update these statements except as required by applicable law.

The medical press release, the fourth quarter of 2020 results is available on its website www dot Davita medical Dot com under the investors section and includes additional details about its financial results.

Medical's website Balkanize the latest SEC filings, which you are encouraged to review the recording of today's call will be available on a beta medical's website by five PM Pacific time today.

Joining me on today's call are Jim Corbett, Chief Executive Officer, and Sean Kim.

Chief Financial Officer, I'll, now turn the call over to Jim for his comments.

Thank you Caroline.

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

I will begin today's call by discussing highlights for the fourth quarter and full year as well as our expectations and guidance for 2023.

Sean will then provide more detailed commentary on our financial performance before opening the call to Q&A.

To begin with we had a strong topline commercial revenue performance with $9 4 million in Q4 2022.

Which is a 37% increase over the same period in the prior year.

For the full year 2022, our commercial revenue was $34 1 million, which was a 36% increase over the prior year.

As a reminder, commercial revenue includes all global revenue.

Excluding the $100000 BARDA revenue recognized in the quarter and $400000 for the year.

I'd like to personally congratulate our field sales team for their successful 2022.

I'd like to provide an update on the initial priorities I discussed on our third quarter call.

With respect to our two pending applications with the FDA.

Our PMA supplement for soft tissue was submitted on the 19th of December and our PMA application for vitiligo, which submitted on the 16th.

180 day review cycle would imply June approvals.

Notably the soft tissue, PMA supplement, which significantly broadened our existing firms market and allow us to leverage our existing burns infrastructure.

Synergies are significant and important.

Second of the nearly 150 burn centers that we're presently approved to sell in approximately half are also either level, one or level two trauma centers.

Which means that these hospitals will have immediate access to the expanded label upon approval.

Additionally, we will be adding approximately 1000 hospital call points that our level, one and level two trauma centers to our current 150 or so hospitals call points.

Third within the U S inpatient burn market, we're configured to only call on the U S burn centers, where 70% of the resell LNG what cases are treated.

The expansion into level, one and level two trauma centers positions, our sales force to capture the remaining 30% of the burn market.

In the second quarter, we will begin calling on these trauma centers we have.

Soft tissue on July one 2023.

As we should have immediate access to our expanded indications and vac approvals and many of these hospitals already upon PMA supplement approval.

Further during the second quarter, we will initiate the planned expansion of our U S field sales organization.

Currently we have 30 field salespeople that we will be expanding to approximately 70 field salespeople, which includes both direct sales and clinical roles.

I emphasize that our contribution margin on new field sales professional is breakeven with approximately five resell kits sold per month per individual currently the average productivity of a direct sales rep exceeds 20 kits per month.

This is what I would like to call weaponized, our gross profit to enhance market adoption and penetration where the sales force expansion pays for itself quickly.

So the vitiligo indication, we expect PMA approval in June 2023, as well we are in process of pursuing in office reimbursement through the MAA CPT code process. It is our goal to secure Medicare reimbursement by January 2025.

During the interim period, we will be implementing cash pay for vitiligo patients and physician sponsored studies to build our podium presence for an intended commercial launch in January 2025.

During our last call I also commit to providing an update on our automation program.

By way of background currently the disaggregation of cells from the autologous sample is done manually and requires frequent training by our field sales team.

We plan to submit our PMA supplement application to the FDA by June 30 of this year.

Just like with soft tissue, we will be subject to the 180 day review cycle and we are project approval by January 2024.

As reported in Q4, we have begun our launch in Japan through our partner cosmetic.

Early returns are very positive.

These sales are recognized in U S dollars and we will report Japan revenues in our footnotes in the foreign revenue line.

During 2023, we expect that Japan will account for over 90% of those international revenues.

With respect to our broader international strategy. It remains on our agenda to communicate our strategy during the November Q3 earnings call.

With respect to 2023 guidance as communicated we will be providing updated annual and quarterly guidance every quarter.

Our annual revenue guidance for 2023 is expected to be in the range of $49 million to $51 million, which would be at midpoint of guidance, 47% growth over 2022.

For the first quarter.

2023.

Expect commercial revenues to be between $10 million and $11 million at the midpoint of this guidance, we would be up over 40% over the prior year.

As I have outlined 2023 will be the year of inflection for <unk> medical transforming our business to encompass multiple indications and dramatically expanding our growth trajectory or.

Our regulatory and commercial teams are making great strides and I look forward to updating you on our progress on future calls.

With that I'd like to turn it over to Sean <unk> acting Chief Financial Officer.

Thank you Jim.

In the three months ended December 31, 2022, our commercial revenue, which excludes barter revenue increased by 37% to $9 4 million compared to $6 8 million in the same period in 2021.

Total revenue, which includes BARDA revenue increased by 36% to $9 5 million compared to $6 9 million in the same period in 2021.

Gross profit margin was 86% compared to 88% for the fourth quarter of 2021.

Total operating expenses for the quarter increased by 2% to $15 million compared to $14 8 million in the same period in 2021.

Higher selling costs are attributable to increased commissions travel cost events associated.

Associated with increased sales activity.

Increased pre commercialization costs are driven by.

Activities related future retail launches in soft tissue repair in vitiligo.

Higher salaries and benefits are driven by the expansion of our workforce to support the overall operation.

Research and development costs were lower due to the following.

The pediatric burn study was closed for enrollment soft tissue repair in vitiligo trial participants were in a less costly follow up phases. This period compared to more coffee recruitment and treatment phases in the prior period.

Along with lower trenches for sponsored research agreements toward pipeline development.

Share based compensation expenses were lower due to a reversal in the current period of a previously recognized expense for Unvested awards related to the termination of a former executive officer.

Net loss decreased by 37% to $5 4 million or 21 per share compared to a net loss of $8 5 million or <unk> 34 per.

Per share in the same period of 2021.

Adjusted EBITDA loss decreased by 39% to $4 million compared to a loss of $6 5 million in the same period in 2021.

For the full year ended December 31, 2022, our commercial revenue increased by 36% to $34 1 million compared to $25 1 million in the same period in 2021.

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 <unk> in Japan.

Total revenue increased by 4% to $34 4 million compared to $33 million in the same period in 2021.

Gross profit margin was 82% relatively flat compared to the same period in 2021.

Total operating expenses increased by 10% to $59 1 million compared to $53 6 million in the same period in 2021.

The increase in operating expenses is attributable to higher salaries and benefits pre commercialization costs.

Selling costs share based compensation expenses, partially offset by lower research and development expenses.

Higher salaries and benefits were primary a result of the expansion of our commercial team along with an increase in our workforce to support the over operations.

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

Higher pre commercialization costs are driven by activities related to future resale launches in soft tissue repair and vitiligo.

Higher selling costs are attributable to increased commissions travel cost and training events due to increased sales activity.

Share based compensation expenses were higher in the current year driven by new equity grants, partially offset by a reversal of a previously recognized expense from best awards related to termination of our former executive officer.

Research and development costs were lower due to the following.

The pediatric burn study was closed for enrollment soft tissue repair and <unk> expense.

And less costly follow up phases in this period compared to more costly recruitment and treatment phases in the prior period.

And a lower expense for sponsored research towards pipeline development in the current period.

This was partially offset by higher development expenses in the current year from ongoing development of next generation devices for an automated preparation of spray on skin cells as compared to the prior year due to early prototype development and testing.

Net loss was $26 7 million or $1 <unk> per share compared to a net loss of $25 1 million or $1 <unk> per share in the same period of 2021.

Adjusted EBITDA loss was $19 million compared to a loss of $18 1 million in the same period in 2021.

A table reconciling non-GAAP measures is included in today's press release for reference.

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

Thank you at this time, we will conduct a question and answer session. As a reminder, ask a question.

We'll need to press star one on your telephone and wait for your name to Danielle <unk>.

Draw your question Press Star one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Joshua Jennings.

Cowen Your line is now open.

Thank you good afternoon.

Congrats on the strong finish to.

Confidence in the outlook.

On the call for the collection in 2023.

Sean I was hoping to ask about guidance.

Full year and first quarter to start and.

If there's any way you can maybe help us think through.

Your outlook for the core burn business re silicone business.

And the growth you anticipate.

And then maybe any assumptions for soft tissue contributions.

For the full year and then for the first quarter just it's a nice sequential step up if you can just remind us about seasonality trends in the burn market in the United States.

Is there some seasonality tailwind or is this just momentum from Q4 carrying into the first two months of 'twenty three already and give you that.

<unk> accomplished a tissue that nice sequential step up in Q1 and it would follow.

Thanks, Josh that was a various distinct single question I'll, Let me take it on.

So correct.

Just fees or so.

So first of all.

With regard to burn business. So let's start with that we saw sequential growth Q4 to Q1 clearly.

And that does not reflect seasonality I'll just give you. Some data if you look at claims data for the last three years by quarter contribution to the year and you average them the average the average.

Vern add midst of resell eligible it sounds like this $25 $25 26 to 24, so very minor changes between Q4 and Q3 and its one point in terms of annual admit so there's really not a seasonality.

Reality that we can define from the claims data. So what we are therefore seeing.

As growth in penetration so that's the that's.

That's the first element I think to your question.

We expect to see through the course of the year Q1, and Q2 has continued.

Adoption and the number of users who use it multiple times per month, increasing as we as our evidence continues to grow the experience with burn surgeons continues to get validated in terms of tissue sparing and.

And healing an early exit from the hospital says really taking at.

Its course, and our field sales team has done a really terrific job.

What happens as we move in them staying on Burns for a second into the second half.

Pending on your math.

30% of the Burns market, which is about 10000 of the 35000 add minutes are in soft tissue repair and they are.

Excuse me.

A third of them are in level, one and two trauma centers okay.

That 10000 cases, we have not been compared to call on.

So one of our expectations as we move through the year.

That adoption will will come our way because of course, our sales team will be calling on those physicians with the very strong accumulated evidence and commercial experience we've had.

Focusing only on burn centers. So that's that's a.

A really big driver for the year on the Burns market.

We're feeling increasingly comfortable.

With our soft tissue repair PMA supplement in terms of timing, we are having a very productive interaction with the FDA were not getting some price surprises of any type and.

As you know are on the breakthrough device designation path.

And that is of course, giving us expedited.

Review, and we don't stop the clock unless theres a material deficiency.

So that has caused us to bet so to speak on that June approval in July one readiness.

So with that readiness during Q2 were expanding as I mentioned, our field force from approximately 30% to 70.

During the second half will build increasing momentum in soft tissue repair it will have.

A curve associated with it.

For example, we will have soft tissue repair indication available and vac approved and virtually half of the burn centers, which are level, one and level two.

Qualified.

We'll also begin the vac process during Q2 and in a number of level, one and two trauma centers using burns as our indication for that process.

It's a bit uncertain at the moment exactly how many we'll get through factor in Q2, which certainly will have a running start and our sales team will be fully in place and trained for that July one launch.

Thanks for walking us through that I appreciate it and just to follow up on the.

The build out of the sales team.

Was hoping to better understand where you are.

Recruiting these reps from and are there any challenges to getting to that 70 number in Q2, where do you feel like Thats, a pretty straight shot based on experience to date.

Thanks again for taking the questions.

Thanks, Josh it is sourced.

Qualitative evaluation on my part, but I don't mind sharing with it.

First of all we have a very strong pipeline of candidates I think the success that <unk> been experiencing in the marketplace translate as well.

Expanding indications that we have and.

And that are coming that translates well in terms of recruiting. The fact that we are well capitalized and have the capital to execute our growth strategy is very appreciated because a lot of companies don't have that so our early returns are that we largely filled the management roles that we're expanding.

Into or have identified them.

<unk> begun interviewing salespeople.

We have a great pipeline of really high quality candidates, they're coming from a number of places, but it come from related wound care companies. They come from med surge type background. So we want salespeople who are.

Experienced and comfortable on the LR and were finding really a strong pipeline of candidates. So we're quite confident that we're going to get our team in place and have adequate time to train them.

It is a big scale up for us in our commercial team is really stepping stepping into this one so it's really.

It kind of inspiring to watch them do it.

Excellent great to hear.

Okay. Thank you please standby for our next question.

Our next question comes from the line of Philip <unk> of Piper. Your line is now open.

Hi, This is bill on for Matt Thanks for taking our questions and congrats on the excellent quarter I guess just for starters on given the expected inflection here in 2023 in your commentary.

Durable either call it 45% growth in the 'twenty four 'twenty five timeframe is.

Is it wrong to say that you're exiting 2023 at nearly 50% growth.

Yes, thanks, Phil.

At midpoint is 47% not 45 just.

To make a finer point of it.

Think that implies a greater than 50% exit rate in Q4, you are correct.

How durable do I think it is I think it's quite durable.

Or a launch of the vitiligo.

In January 25.

No that's really helpful and I guess, one more for me.

And given the rapid increase in the sales force here in Q2, what Kasper unexpected to look like and how do you think about capitalization moving forward.

I appreciate the commentary that Opex should peak in Q3, but what should we be thinking about there.

Well, clearly, we're making an investment in market growth.

Now go back to our 83% gross profit.

And and how we look at each of those investments contribution margin for.

A sales rep.

It's covered by five resells sales a month.

So for us that.

As from a looking at our burns experience each rep averages well over 20 per month.

So we do have an expectation about when they cross over and it is without getting precise about it because it does have variability it's a number of months not a year.

They will crossover so I think from a cash burn point of view, we feel quite comfortable for example.

Sure.

Absent.

Investments in <unk> International we expect to end 24 with <unk>.

In excess of $30 million of cash so that will be after another expansion and another growth year. So we feel very comfortable with our capital position as it is today.

Awesome. Thank you so much.

You bet. Thank you.

Thank you please standby for our next question.

Our next question comes from the line of Ryan Zimmerman of <unk>. Your line is now open.

Hi, This is Sam on for Ryan and Thank you for taking my questions. This next one is on the Japanese market and the partnership with cosmetic do.

Do you expect meaningful contributions from the Japanese market in 2023, and how should we think about that given the guidance. You provided then I have a follow up as well. Thank you.

Well first of all our early returns in Japan are going well.

<unk> performed in the.

Territory or in excess of one hundreds of patients so far.

That said, we do not have enough experience with them that we're giving specific guidance on Japan.

Though you'll note that it is.

Even added a couple of hundred in the short time. It has been we do expect expect a strong performance from Japan, remembering that we recognized 40% of the selling price.

So on one hand, it's a very high gross profit operating profit type sale.

Also lower per case and revenue, but lower expense.

Produce so I think in the coming quarter My objective and my conversations with cosmetic is to be in a place where we can project forward our expectations for Japan.

Not quite ready to.

To express that in this moment.

Thank you that's very helpful. This next one is on vitiligo, you indicated that <unk> likely to still be approved in June of 2023 with insurance reimbursement established in January of 2025.

Can you provide us any updates on conversations you've had with insurance payers as you look to establish reimbursement for vitiligo. Thank you again.

Yes, you bet actually we've had no formal conversations with payers at this time they of course dedicate their time to products that are.

Ready for market and we are still a few months away from that our expectation is of course that.

What we're looking for is to establish resell as in office treatment.

Alternative.

So that is a process that is embedded in sort of the reimbursement world. So.

Kind of a complex question to answer we Havent gone to private insurers yet we will in fact go to CMS.

First so that that will happen.

Post later this year.

Thank you.

Okay. Thank you please standby for our net.

Yes.

Our next question comes from the line of Brooks O'neil of Lake Street Capital markets. Your line is now open.

Well, thank you and good afternoon, everyone. I was hoping you might talk a little bit about what's your.

Patients are with regard to.

The diagram.

The dynamics in the soft tissue market relative to your experience with large burn in terms of.

And a number of cases.

That retail might be appropriate for.

Let's say per week or per month.

In the centers youre going to attack.

How many kits per per case.

Some of those things would help us to get a good deal for sort of how you view the opportunity in soft tissue.

Yes, Thanks Brooks.

Let me try and work through that thought because theres a number of questions. I think you raised so first and foremost in soft tissue repair and reconstruction, which we the label.

We believe.

The cases themselves will utilize less resell kits per patient.

So in large burns is common for one or more kits to be used on patient wear and a soft tissue market that will happen.

Quite less often so thats I think the first part of your <unk>.

Question. The second is the number of patients to be treated.

It's in the order of Forex available resell.

Patients that might present themselves for example.

Therefore, there will be burns patients, who present that will happen they won't be the large greater than 30% TB assay burns, but there'll be smaller burns nonetheless need treatment will see necrotizing bacteria will see gloving, we'll see.

Operations will see acute wounds. So there's so many applications, which is on one hand, a great market opportunity. It requires on the other hand <unk>.

Extensive training and focus on our part of our sales team. So we really will be moving from the big accounts to the small and the reason of course is when you camp out in the Big accounts, you get access to all of those indications and we allow our FDA submission.

The automation is so to speak Cook at FDA, so that by the time, we're moving to smaller.

Smaller level, one and two trauma centers in January .

24, we expect to have our automation program launched and ready to go and improved.

So it's a.

There's going to be a constant evolution and are both.

<unk> to get Vac approvals, all the way to these broader indications too.

Starting to move into smaller level, one or two trauma centers and everything benefiting from the absolute adrenaline injection of automation, so automation will make our sales team so much more productive.

Great. That's really helpful. So let me just ask one more.

I'm very intrigued by the comment you made about.

Getting to breakeven with five kids, Paul I think you said, Bob but I might have that wrong.

And.

The average the 20 kits.

Do you envision the dynamics.

Small soft tissue being the same and third world.

And average salesmen being able to sell 20 catch or do you think they might be able to sell a lot more.

Kind of what's your expectation for how quickly.

We'll get up to be average or better.

Okay perfect. So for clarification those metric I used.

Was contribution margin for the cost of a rep is equivalent approximately two five resale kits.

And that our current.

The sales reps and burns only are averaging in excess of 20%. So just as a baseline that's where we are.

First question is do we expect that five to be the same for our expanded sales organization to answers yes. It.

It's the same we'll be.

You're selling a.

Virtually the same kit that is.

Sold at the same price. So therefore, we manufactured for the same so the 83% gross profit works still in that equation.

Do we think that the market opportunity to be greater than <unk> 20 per month per month exists actually very much. So we expect it.

<unk> is quite higher than that.

Of course the market.

<unk> is the patients.

That we are.

Treating our approximately Forex times the number that are in burns. So we think that opportunity is really rich now we have to execute but that's a big opportunity.

<unk> for us.

I think I got all your questions.

Miss one no you did Jim Thanks, a lot.

It's a pretty.

Exciting opportunity and I can't wait to see it unfold.

Okay.

Brooks me too.

As a reminder to ask a question you will need to press star one one on your telephone.

Our next question comes.

Line of.

Lyanne Harrison of Bank of America. Your line is now open.

Hi, good afternoon.

Just a follow up on Brooks question I have one more on that in terms of.

The ramp up Brian types with a salesperson.

Get from zero to five <unk>, a month and then from five kits.

'twenty kit demand what does that profile look like for the purposes of us looking at what the ramp up might be for soft tissue.

Yes.

Really terrific question, we do have data on that it's fairly variable.

But on the front end of it it is a.

Less than a half a year.

And on the longer end, it's well under a year. So it's variable, but we know it's months, we know it's not years. So they've passed set five pretty consistently in a.

Short number of months and then they get it takes more work in fact, when we were launching with Burns who is actually harder we were.

Less proven at that time.

And the market was narrower in terms of the indication we were pursuing.

So we actually are very optimistic about the equation that youre, describing I'd like to give you a more precise answer but I can suffice to say it's months not a year.

Year.

And I think that's probably as good.

As tight as I can make that interval at the moment.

No. That's that's very helpful.

And then just to follow up a question of gross margins, obviously seeing slightly gross margin slightly down this quarter, but.

Over time, it has expanded significantly as volume increased.

Do you have an expectation on target gross margin of where you might end up at the end of financial 'twenty three.

Yes actually.

Our gross margin has some variability to it.

There are very we don't experience.

Price competition, but we have volume related discounts that come into play, particularly as you move through the end of the year. So that's one factor.

We've recently made some improvements the up note an hour.

Our manufacturing process.

Very specifically kind of in the <unk> category. If you don't mind, but we had this process, where we had to ship what's called cold chain in a <unk>.

Package to control temperature.

And in the last few months.

Succeeded in establishing that data.

<unk> made that cold chain shipping not necessary and removed rather substantial cost that we will see going forward. So I think we feel very confident about two things our cost of goods improving.

And the stability of our average selling price were.

It is.

Mostly subject to volume discount versus price competition.

Thank you very much at all I had.

Okay.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Thank you very much.

Q4 2022 AVITA Medical Inc Earnings Call

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