AVITA Medical Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 9 speakers on the call.

Operator

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

Operator

I would now like to hand the conference over to your first speaker today, Jessica Ekberg, Director of Investor Relations.

Speaker 1

Thank you, operator. Welcome to Aveda Medical's 2nd quarter 2024 earnings call. Joining me on today's call are Jim Corbett, Chief Executive Officer and David O'Toole, Chief Financial Officer. Today's earnings release and presentation are available on our website, www dotavidamedical.com, under the Investor Relations section. Before we begin, I'd like to remind you that this call includes forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward looking statements. Please review our most recent filings with the SEC for a comprehensive description of the risk factors. Any forward looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Jim for his comments.

Speaker 2

Thank you, Jessica. Good afternoon and thank you for joining us today. I will begin today's call by discussing our financial and business results for the Q2, followed by our priorities and outlook for the remainder of 2024. Following this update, I will turn the call over to David, who will provide commentary on our financial performance for the quarter before opening the call to Q and A. During the quarter, we focused on addressing the challenges we faced in the Q1 by implementing an enhanced coverage strategy and other strategic initiatives focused on execution.

Speaker 2

Our commitment to these efforts and sustaining growth are reflected in our 2nd quarter commercial revenue of $15,100,000 which was at the higher end of our previously provided guidance range of $14,300,000 to $15,300,000 Additionally, 1 week ago, we entered into an exclusive multiyear development and distribution agreement with Regenity Biosciences. Through this agreement, following 510 approval by the FDA, we will hold the marketing, sales and distribution rights to an Aveda Medical labeled collagen based dermal matrix manufactured by REGENITY. I will discuss it in more detail later in the call. To further support our growth and strategic initiatives, we have significantly strengthened our management team with the addition of Robin Vandenberg as Senior Vice President of U. S.

Speaker 2

Commercial Sales. Robin, who joins us from a distinguished career at Smith and Nephew is an accomplished executive with a proven ability to drive new product adoption and growth across multiple specialties, making her the ideal leader of our sales organization. She officially joined us earlier this week and we were confident that her vision and industry experience will be instrumental in expanding our market presence with the Resell GO driving adoption of our portfolio of products and accelerating growth. In addition to implementing enhanced coverage strategies, we're beginning to yield results from our full thickness skin defect launch. As presented on Slide 3 of our earnings presentation, we have become more efficient with both the VAC approval process and closing new accounts.

Speaker 2

In the Q2, we added 31 new accounts, all of which placed orders. Moreover, we had an additional 6 accounts received VAC approval, but not have not yet ordered for a total of 37 accounts for the quarter. As a reminder, new accounts are launching with Resell GO from the gate, eliminating the need for conversion. In terms of our pipeline for full thickness skin defects, we have 52 accounts in the evaluation stage and 37 accounts in the decision stage for a total in back as of July 31 of 89 accounts with a healthy pipeline of additional prospects for the rest of the year. In addition, we have 19 facilities that are in vac for Permioderm.

Speaker 2

With that, let's turn our attention to Resell Go. In 2022, I outlined 3 initial priorities for Aveda Medical, which included a commitment to a next generation resale device now known as ReCell Go. For those new to the story, the prior version was a single use battery operated manual system used to prepare spray on skin cells capable of covering a wound area of up to 1920 square centimeters or approximately 10% total body surface area. WESEL GO prepares the same spray on skin cells and treats the same wound area, but features an evolutionary design with 2 components, a multi use AC powered processing device and a preparation kit containing a single use cartridge, disaggregation head, the ReCell enzyme and other components. The ReCellGo processing unit controls the pressure applied to the donor skin to disaggregate the cells and precisely regulates soak time to optimize cell yield and viability.

Speaker 2

The standardizing of the process produces consistent results. Additionally, these enhancements streamline the preparation and simplify the user interface, reducing the training burden on medical staff and on our field team. On May 29, we received FDA approval for Resell Go for the treatment of thermal burns and full fitness skin defects. Demonstrating our unwavering commitment to patient care and rapid response, we shipped the first RESOUGHT the next day. This swift action allowed clinicians together with our team to complete the first RESEL GO case on May 31, just 2 days after FDA approval.

Speaker 2

And yes, the procedure was a success. This extraordinary effort was made possible by the dedication of our entire organization. I want to thank each and every team member for their invaluable contributions. Now let's dive into what Resell GO means for our business. Please turn to Slide 4, so you can see for yourself.

Speaker 2

For those of you participating by telephone, Slide 4 has 3 images. In the first image, 2 ReCellGo processing devices were used. One device has completed its multi step process, while the other device had 7 minutes left. Given that 2 single use cartridges were necessary, we can assume that this patient had a burn injury of more than 10%, but less than 20% total body surface area as one cartridge can treat up to approximately 10% total body surface area. In the second image, 3 devices were utilized for this case, indicating a burn injury of more than 20%, but less than 30%.

Speaker 2

One cartridge had been fully processed and those spray on skin cells were ready for application, while the other two devices were still in use. And in the 3rd image, 4 ReCellCo processing devices are operating simultaneously, suggesting a burn injury of more than 30%, but less than 40% total body surface area. If you find that compelling, please turn to Slide 5. Here you see a burn center clinician proudly showcasing not 1, not 2, but 6 ReCell Go processing devices that were used for a patient with more than 50%, but less than 60% total body surface area. It's hard to see because of her mask, but I can promise you, she is smiling and so are we.

Speaker 2

For starters, Resil Go's advanced features not only streamline the preparation of spray on skin cells, but also significantly boost workflow efficiency in the operating room. A physician could start preparing a patient's burning wound for the application of spray on skin cells, while the ReCell Go device is processing the donor skin sample. Whereas with our prior ReCell device design, the physician would still be scraping cells from the first skin sample. Importantly, when the injury exceeds 10% total body surface area like Slide number 5, multiple ReCellGo processing devices can be used concurrently. This allows physicians to continue delicate and complex patient treatment while the machines are processing, significantly reducing operating room time for patients with major and severe burns and trauma injuries in critical condition.

Speaker 2

When you shorten the operating room time, a positive domino effect occurs, especially with large burn injuries. Following major burn injuries, patients lose the ability to regulate their core body temperature, placing them at high risk of hypothermia and other metabolic issues. As such, the ambient temperature in operating rooms for surgeries can be upwards of 100 degrees, most commonly around our average body temperature of 98 degrees depending on the size of the injury and the patient's vitals. Compare that to the average temperature in an office space, which is between 70 to 74 degrees. Thus, shortening operating room time directly benefits the patient by reducing thermoregulatory and hypermetabolic danger.

Speaker 2

Most importantly, WeSoGo was not just designed with the clinicians in mind, it was designed for patients as a reduction in operating time means patients spend less time with open wounds and less time under anesthesia. The faster patients exit the operating room, the faster patients start their healing journey. This is Resell Go. Resell Go along with the ability to run multiple Resell Go devices simultaneously ushers in a new era in the treatment of partial thickness and full thickness wounds. We believe integrating ReCell Go into patient care empowers clinicians to expand treatment capabilities, reach more patients and achieve optimal outcomes, plus drive a greater adoption and setting a new standard of care in wound care management.

Speaker 2

As discussed last quarter, we identified the need for a solution to treat smaller wounds, leading to the development of Resell Go Mini, designed to address small wounds up to 480 square centimeters or approximately 2.5% total body surface area or less. While resale is viewed as highly effective for large burns, it's primarily seen as a large burn solution leading to underutilization for smaller wounds. Trauma and burn surgeons prioritize clinical utility and often perceive the use of the current large kit for smaller wounds as inefficient, Recognizing that a majority of full fitness skin defects are smaller than 480 Square centimeters, Wecel Go Mini is poised to address the significant market need offering a tailored solution for these smaller wounds. Regarding the timing of Resocal Mini, we submitted a PMA supplement to the FDA on June 28. This version utilizes the same multi use processing unit as ReCell Go and features a cartridge designed for the smaller donor samples needed for smaller wounds.

Speaker 2

Importantly, this submission benefits from the same breakthrough device designation that was granted to our existing resale system, ensuring a prioritized 180 day interactive review period implying an approval date of December 27. Before we move into our new dermal matrix, I have a brief update on our international expansion efforts. We are making progress expanding into most of the European Union through 3rd party distribution partnerships. Over the last few weeks, we have executed distribution agreements in Belgium, Holland, Ireland, Italy and in the United Kingdom and 4 Nordic countries. Additionally, the countries of Spain and Portugal are on the near term horizon.

Speaker 2

In regard to our European Union efforts, we expect to receive the CE Mark for Resell Go this quarter. As demonstrated with our success in the U. S, we are fully prepared to meet the supply demands upon approval. Moving on to our portfolio of products. Last quarter, we showed you Slide 6, which reflects a broad continuum of clinical needs in burn, surgical, traumatic and chronic wound care.

Speaker 2

While ReCell will remain the cornerstone of our portfolio, we have been actively exploring wound bed preparation and dermal replacement products to complement, resell and address this full spectrum of clinical needs. To that end, we had Permioderm in the Q1 and now have an Aveda medical label dermal matrix in development with REGENITY. Both Permioderm and the dermal matrix are compatible with ReCell and each other and both can be used alongside the treatment of many of our burn and full thickness cases to further aid in healing. Collectively, these products align with our vision to build a broad based wound care company. To better understand our strategy with REGENITY, I will provide an overview of REGENITY and discuss our regulatory, clinical and commercial plans for our dermal matrix.

Speaker 2

For more than 25 years, REGENITY has been a leading global developer and manufacturer of proprietary bioresorbable materials used to repair and regenerate natural tissue and bone for a variety of clinical areas, including dental, spine, orthopedic, neurosurgery, ENT, advanced wound care and nerve repair. Initially focused on collagen based medical devices, Rigenity has since expanded its platform to include versatile bioresorbable and biocompatible synthetic polymers, bioceramics and other bioresorbable materials. Throughout its history, Rigenity has successfully assisted medtech clients in securing regulatory approval for more than 70 product lines. After robust diligence and preclinical research, we have the animal data to demonstrate the effectiveness of a REGENITY dermal matrix to promote STELL growth in the wound bed. We expect 510 clearance in the 4th quarter, followed by an initial launch with the 510 indication.

Speaker 2

Regarding our clinical plans, immediately following clearance, we plan to initiate multiple post market clinical studies to establish the unique synergies between our new dermal matrix and ReCell. These studies will include the evaluation of our new dermal matrix and other commercially available dermal matrices in full thickness wounds, followed by delayed treatment with a split thickness skin graft plus ReCell and a 2 stage procedure, which is the current standard of care to demonstrate improved time to grafting and wound closure. Additional clinical studies will evaluate the use of our new dermal matrix with immediate grafting together with ReCell in a single procedure aiming to establish a new standard of care. We expect to begin enrollment in both of these studies in the Q4 for completion in 2025. Let's revisit Slide 7 of our presentation, which illustrates the complementary nature of ReCell, Permianderm and our new dermal matrix with the other potential additions to our portfolio.

Speaker 2

Here's an example of a whole thickness skin defect with concern for infection. In this instance, the dark blue layer represents dressings for wound bed preparation, a current focus. This product serves as a protective antimicrobial layer in the base of the wound bed to maintain an optimal healing environment. This layer can be used in every single patient. The green layer represents the new dermal matrix.

Speaker 2

This type of matrix aims to generate vascularized tissue further supporting definitive closure. The light blue layer represents ReCell with a meshed split thickness skin graft. As you're aware, this procedure provides definitive closure using significantly less skin compared to traditional autografting. Lastly is the purple layer, which is the transparent Permioderm dressing optimized for protection and moisture management. By addressing the full spectrum of clinical needs across our portfolio, we believe that we can improve accessibility and reach more patients, which is our number one priority.

Speaker 2

Now an update on TOME, which is our post market study for vitiligo. We have completed the 6 month follow ups and are on pace to have the research accepted for publication with the 6 month TONE data and manuscript by the end of Q4. The same timeframe applies to the healthcare economic study associated with our Vitiligo initiative. In closing, we're taking advantage of a well executed quarter and our momentum and remain committed to our efforts to expand our reach, drive increased adoption and sustain growth with our indications as well as our expanding portfolio, all with the goal of delivering value to our shareholders, our customers and their patients and our employees. With that, I'll turn the call over to David.

Speaker 3

Thank you, Jim. For the 3 months ended June 30, 2024, our commercial revenue reached $15,100,000 which is an increase of approximately 29% compared to the same period in 2023. As you can see on Slide 8, the revenue growth trajectory over the last 8 quarters has been significant and we believe it will only accelerate over the remainder of the year and subsequent years. Resale products accounted for approximately 98% of our commercial revenue, while our other wound care products contributed approximately 2%. With our 2 new products, Permioderm and our dermal matrix, and the hiring of Robin Vandenberg positions us well for sustained revenue growth for the remainder of the year.

Speaker 3

Gross profit margin for the quarter was 86.2% compared to 81.2% in the same period in 2023. This 500 basis point increase is in line with our expectations for the full year 2024 as revenues and volume of production continue to provide a healthy and improving gross margin. Total operating expenses for the quarter were $28,700,000 compared to $21,200,000 in the same period in 2023. The increase in operating expenses is primarily attributable to an increase of $6,300,000 in sales and marketing expenses due to employee related costs, including salaries and benefits, commissions and travel expense collectively as a result of expansion of the commercial sales organization in the Q2 of 2023 and again in Q1 2024 to support our growing commercial operations. G and A expenses increased by $1,400,000 as a result of higher salaries and benefits and an increase in severance benefits, partially offset by lower stock compensation and professional fees.

Speaker 3

Additionally, R and D costs decreased by $200,000 due primarily to lower employee compensation costs for our medical science liaison teams. Other income increased by $800,000 to 1,600,000 in the current quarter. Other income for the quarter consists of non cash income of $2,100,000 due to the change in fair value of the warrant liability, offset by $1,200,000 of expense for the change in the fair value of the debt and $700,000 in income related to our investing activities. Net loss for the Q2 was $15,400,000 or a loss of $0.60 per basic and diluted share, compared to a net loss of $10,400,000 or a loss of $0.41 per basic and diluted share in the same period in 2023. As of June 30, we had cash, cash equivalents and marketable securities of $54,100,000 compared to $89,100,000 as of December 31, 2023.

Speaker 3

We maintain our previous guidance that we will reach cash flow breakeven and GAAP profitability no later than the Q3 of 2025. Turning now to our revenue guidance for Q3 2024. We believe it is crucial that we reestablish credibility with our shareholders. We have taken significant steps towards this goal by reaching the upper end of our Q2 guidance. For the Q3 of 2024, we remain committed to providing guidance that reflects our capabilities, while achieving substantial revenue growth.

Speaker 3

With that in mind, we expect commercial revenue to be in the range of $19,000,000 to $20,000,000 representing approximately 40% to 48% growth compared to the same period in 2023. With a strong start in July, we are confident in our commercial team's ability to deliver on this target. Regarding annual guidance, our Q1 revenue miss has impacted our full year expectations. Although we are confident in our Q3 guidance, reaching the lower end of our prior guidance of $78,500,000 is no longer feasible. As a result, we are revising our annual guidance to an attainable range of $68,000,000 to 70,000,000 dollars Even with this adjustment, we expect to achieve over 37% growth year over year, reflecting our ongoing growth trajectory.

Speaker 3

With new sales management, improved VAC and commercial processes, the recent launch of Resell Go and PermioDerm and the anticipated commercialization of our new dermal matrix in Q4, we intend to build on our 2nd quarter momentum and continue delivering strong results. Given our solid performance in July, we look forward to meeting our Q3 revenue expectations. With that, we thank you for joining us. And now I will turn the call back to the operator for your questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Ryan Zimmerman, BTIG.

Speaker 4

Hey, guys. Good afternoon. Thanks for taking our questions. Can you hear me okay?

Speaker 2

Yes, we can, Ryan. It's good to hear from you.

Speaker 4

All right. Well, I wanted to ask about the guidance. I appreciate you guys took a prudent approach with the adjustment to guidance here. Maybe, David, talk to us about kind of what underpins your view, particularly for the Q4. It's still a sizable step up from what we saw this quarter.

Speaker 4

And how much contribution are you expecting from full thickness skin defects? Jim, if I recall last quarter, your goal as you entered this year was about 15 accounts per month. We're still not there yet. So I know July is off to a good start, but talk to us maybe a little bit more about kind of what that means from July?

Speaker 2

Yes. Ryan, I think maybe I'll take this first. Fundamentally, there's the big drivers, the number one driver is the Resell Go conversion, which we expect to substantially complete within the quarter. And if you were able to see the slides, you would note using Resell Go has a consequence of greater utilization. So that is one of the underpinning efforts.

Speaker 2

During the quarter, we did you're correct, we did not average 45. However, we had a total of 37 approvals, 31 who ordered to 6 who got approved who are going to order. So we substantially improved that. We also have 85 in the VAC decision stage of 1 of 2 different stages we categorized them in. So that's 85 in the pipeline that have scheduled evaluations or decisions during the quarter.

Speaker 2

So we have a lot there plus the Permianderm launch of it takes a little time. It was really up beginning of Q2 launch. So we're just starting to get our legs under our feet. At the moment, we have just under 2019, I believe, 2019 in the back stage and we're getting progressively more activity with that. So we do have a lot of wind at our back in terms of execution materials, the things you need to make the number grow the way that it needs to.

Speaker 2

So that is fundamental to what's driving our guidance for the next two quarters.

Speaker 4

Okay. That's helpful. And then, David, you've repeated the guidance, excuse me, that you would be cash flow, I think, breakeven by the Q3 of 'twenty five. But your expenses are up, cash burn is down a healthy bit. What are you going to cut back on potentially?

Speaker 4

Where can you cut back just to get to that point? Or is it all predicated on top line revenue growth, particularly in 2025, as an acceleration of the levels you're seeing this year?

Speaker 3

Yes. Thanks, Ryan. For the most part, it's all driven by top line growth revenue. We are still projecting 86% greater margin. And so just for example, even with our guidance for this quarter, which is around 20,000,000 dollars At 86%, that's about $18,000,000 of gross margin.

Speaker 3

And you're right, our operating expenses are up, but the operating expenses also include noncash items stock comp and depreciation and amortization. And so if you project out sequential revenue growth over the next few quarters and you can pick a number that you would like to as far as whether it be 30%, 20%, and you can see that we can get there and we can get to covering our operating expenses in 3 to 4 quarters.

Speaker 4

No, I appreciate it, David. And yes, I understood. Okay, I'll hop back in queue. Thank you for the color, guys. Thank you.

Operator

Our next question comes from Joshua Jennings at TD Cowen.

Speaker 5

Cohen. I wanted to just ask Jim, I think I know the answer to this, but just early days of the full thickness skin defect indication launch and just what you're seeing out in the field, are you still as optimistic as you were pre launch and any different thoughts just in terms of the TAM and the opportunity here in the U. S. For resell in that indication?

Operator

One moment. The speaker has are having some technical difficulties.

Speaker 5

Okay. I thought they were on my end. Thanks.

Operator

Our speakers are back on.

Speaker 2

Okay. Josh, are you still there?

Speaker 5

I am, Jim. Thanks. I'm not sure if you caught my question or not.

Speaker 2

Think we solved it. Okay. Back to your question. With regard to full thickness, so what have we learned and what have we done? So simple answer to your question is we're just as optimistic about the TAM and the potential for it as we were.

Speaker 2

What we've learned is that there's a we're going to centers where resell is a very new idea, where they've known about it in the burn world for a long time. So that results in really three forms of VAC processes and 2 of them dominate. We'll get a conditional VAC do an evaluation before we give you full approval or they'll say prior to VAC do an evaluation before we approve you at VAC. And a smaller number than those 2 gives us approval straight away. So that's really created that longer VAC approval period.

Speaker 2

And you can see though the interest. Our numbers of accounts last quarter that we converted were 22. There we have 37 approvals, 31 have ordered this quarter and we have 85 additional in the pipeline. Now further to what we've also learned caused us to develop, validate and submit the data for the ReCellGo Mini for the smaller under 480 square centimeter wounds. So I think that's going to continue to build the adoption and but those are things we learned and we remain quite bullish on the market potential.

Speaker 2

And of course, we get to add Permioderm as a dressing addition, excuse me. And of course, we're with our dermal matrix, we'll have that and it won't be tandem because it'll be 3 product lines that can potentially be used on each of these patients. That's great

Speaker 5

to hear. And I wanted to it's nice to see just the build out of the portfolio and addressing the continuum of this wound care action. I wanted to hone in on the REGENITY dermal matrix product and maybe just help us think about the competitive landscape there, the size of that segment and anything you can share in terms of pricing expectations

Speaker 2

per case? Thanks for taking the questions. Yes. It's a multiple layer question. So let me give you a range.

Speaker 2

The competitive marketplace has approximately a price range of, let's say, dollars 14 to $15 a square centimeter on average in the hospital, okay? So if you extended that and that will be the market leader with about most data. And then if you extended that, it would be $28,000 for a 2,000 square centimeter wound, okay? So that's a substantially significant potential sale. Now in our case, we have some expectations.

Speaker 2

1st of all, selling it with a 510, we will have to sell it for less than that at the outset. As we build our data and achieve 2 stage comparability, we'll be able to achieve a higher ASP, okay? Now stepping through that one more time, we have a high belief and based on the validated large animal, their pigs, models where we've compared the dermal matrix that we've had designed for us versus the competitors in the market. The two key measures are the time it takes to become graft ready and the time it takes to fully close. And obviously, the first one is when you apply the graft over the dermal matrix is key.

Speaker 2

Now in our non clinical animal studies, we close at nearly half the time of any other product on the market, which will naturally lead so that's graft ready in under half the time. And that obviously is going to lead to an earlier closure time, which is incredibly valuable for patient care, for the patient getting out of the hospital, for the cost of care. And if you take one further step, which we intend to still have to validate, the other qualities of this dermal matrix include its absorption and histological integration with the wound. We believe that we are one of the studies we're going to run is going to be a single stage closure with ReCell, where you apply the dermal matrix with resell and split thickness skin graft all in one procedure and then you don't have 2 procedures. So it's really a rather if we achieve parity on the 2 stage, but we do it much quicker, that has huge market competitiveness.

Speaker 2

If we can validate the size of wound that will respond to a single stage closure, we redefine patient care. So this is really a big potential.

Speaker 5

That's super helpful. Thanks for all those details.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from Brooks O'Neil at Lake Street Capital Markets.

Speaker 6

Hey, guys. This is Aaron on the line for Brooks. Thanks for taking our questions.

Speaker 2

You bet.

Speaker 6

Just going back to the guidance real quick.

Speaker 7

With this new range, I guess, are

Speaker 6

you guys feeling any sort of heightened pressure from the debt covenants as you sort of move forward to the back half of the year? I think with the new range, you're just a tad above the first revenue covenant to end the year. I guess just how are you sort of thinking about that as we sort of approach the back half of the year here?

Speaker 2

Well, fundamentally what we're thinking about is executing well. In Q2, we improved our execution really significantly over Q1. Q3, we're off to when we set this guidance, keep in mind July is behind us. So we had a very strong July. When we look forward to the year, yes, there's a debt covenant there.

Speaker 2

Are we thinking much about it? Candidly, no. What we're thinking about is executing Q3. We execute Q3. Q4 will take care of itself and we don't think there is much challenge there.

Speaker 2

Yes, it's tighter, but we're not focused on that. We're focused on executing on our plan, building out our portfolio and getting back on the growth track and being reliable in our guidance.

Speaker 6

Yes. Okay. That makes sense. Thank you for that. And then I guess maybe just a little bit more color on the international expansion.

Speaker 6

I know you mentioned a few countries that you were starting to enter there in your prepared remarks. But maybe just what does that process sort of look like long term? Do you have any areas specifically where you want to focus more? Or maybe just how are you sort of thinking about that expansion moving forward? Thanks guys.

Speaker 2

Sure, Sure. That's a good question. So let's recall the filter. The filter was number 1 to have a healthcare system that can utilize resell. So there's really not that many of those.

Speaker 2

The second filter was to have a population that made it worthwhile to go there and the ability to pay is a third filter. So that largely confines you to Australia, Japan and most of the European Union. What we're focused on right at the moment are approximately 10 countries in the European Union when we described it. There's Nordic countries, UK, which is not in the EU, of course, but it's nearby. A little change in geopolitical world.

Speaker 2

But so Belgium, Holland, Germany, Austria and Switzerland are with a single distributor. We're close with Spain and we're close with Italy. In fact, we expect all those to happen this quarter. One of the things that has paced our entry is the approval of ResellGo in the EU under the new MDR. We do expect that within the quarter.

Speaker 2

So that is going to break out make a breakout because really it's much less training to use Resell GO than to implement the coverage strategy we took here in the United States. The amount of case coverage and training that's required has been substantial in our history and we already see the difference. So we're going to be principally focusing on the countries I just named. Australia, we're not quite there yet. We're on the market in Japan, as you know, with the burn indication.

Speaker 2

Resilgo is well behind the rest of the geographies that we intend to operate in. But we're going to focus EU, Australia, Japan, internationally through 3rd party distributor partnerships.

Speaker 6

Okay. Thanks for that color. Super helpful again. Thank you.

Speaker 2

You bet.

Operator

Our next question comes from Ross Osborne at Cantor Fitzgerald.

Speaker 7

Hey guys, thanks for taking our questions. So looking at your full thickness indication, which is clearly a broad indication, are you seeing adoption for any particular defects within it more so than others? And then with the launch of dermal and combination with ReCell, is that particularly useful for certain defects more so than others, again, within that broad full thickness indication?

Speaker 2

Okay. Two broad questions. So what I'll say about full thickness is we are much more seeing the responsiveness in acute wounds, degloving, necrotizing, fasciitis, those types of wounds, severe trauma, much less focus in the moment in chronic wounds like diabetes, foot ulcers or VOUs, for example. So we're seeing them in the acute wounds. That's where the initial as we've been in the market now just about a year, that's really where the action is for us at the moment.

Speaker 2

Now turning to our dermal matrix, where will it apply? It will actually apply to our burn world in a big way. It will apply to all of the full thickness cases. It will also apply to the chronic wound market as will Permuderm. So both the dermal matrix and Permuderm will fit the whole full thickness continuum.

Speaker 2

Recell and chronic takes a bit of study to figure out how to identify which patients will be responsive to that. So we're doing some work on that. And what's in question in terms of effectiveness is chronic wounds are chronic for a reason. They have an underlying condition, for example, a venous leg ulcers failure to have venous return because of an incompetent deep pain bowel failure, right? So without a solution to that, you have difficulty finding which patients will be responsive and have a durable skin graft as a solution.

Speaker 2

So that's there's work to do there. But it's a broad and rich and deep market, that is for sure, especially with our new portfolio.

Speaker 7

Okay, great. That's very helpful. And then one more on the international side of things. Can you walk through the reimbursement dynamics broadly realizing it may vary by geography? And then in terms of the amount of sales force you think you'll need to support growth and is that contemplated in your 3Q, twenty twenty five cash breakeven guide?

Speaker 7

Thank you.

Speaker 2

Sure. Let me take the reimbursement in those 10 countries is different in each of them. It's all of them have sufficient health care systems and ability to utilize ReCell and achieve a reimbursement, which of course we share with our distributor. That said, reimbursement is a reflection of social system. So it's a really complex question probably maybe we can have a separate call to talk about it because it is different.

Speaker 2

We do expect to average an ASP at end customer that will be somewhere in the area of 75% to 80% of our U. S. ASP and which we'll be splitting in each of these cases. So that's, I think one answer that helps you if that, I think gets it. It's a

Speaker 7

plus a complex

Speaker 2

reimbursement system. Now with regard to Salesforce, since we're using 3rd party internationally, we don't of course, we don't need it. In the U. S, we have no plans to expand our U. S.

Speaker 2

Commercial headcount over the next 18 months. No plans. We think we've got sufficient headcount to sufficiently cover and penetrate the accounts, particularly with our broader product line. We have a lot we'll have a lot to sell over the next 18 months.

Speaker 7

Okay, great. Thanks for taking my questions.

Speaker 2

You bet.

Operator

Thank you. Our next question comes from Leanne Harrison at Bank of America.

Speaker 8

Hi, Jim. Good morning, David. Can you hear me okay?

Speaker 2

Yes. We can hear you. Good morning.

Speaker 8

Good morning. Sorry, it's good evening for you over there. But can I talk about your Slide 3 and the pipeline that you've currently got there, something in the vicinity of 89 accounts in the pipeline? Can you tell me how long it's taking currently to get through the VAC evaluation stage, the VAC decision stage? And also for this quarter, you've got some that are VAC approved, but no orders yet.

Speaker 8

How long does it normally take once they're approved for them to put orders through?

Speaker 2

Perfect. You're helping us break down. There's a few stages there. So the in the VAC decision stage, the multiple VAC stages, let me characterize it this way. There are VAACs that have a pre case evaluation clinical use where the VAC has given that direction and then they were subsequently approved.

Speaker 2

There's a category, which is in there, that is fact has said we provisionally approve, do an evaluation and report back to us before we officially do it. That's a subtle difference between the 2, but that's the difference. And that is the majority, those 2 together. And the third is we occasionally get a fact approved all straight away, but it is a minority of our experience. Now how long is it taking this group in general?

Speaker 2

It's between 4 6 months. So what you see is that of like, for example, the 31 6 this quarter, that of course is up from 22 Q1 to 31 plus 6, 31 ordered. 6 didn't, they were approved late in the quarter. So typically, following back approval, we'll get an order within a week or 2. So it's usually quite quickly.

Speaker 2

Getting through the process, however, is taking us rather consistently 4 to 6 months. So 85 is building. So our pipeline, if you go back, we'll well achieve more than 200 new accounts this year at our current pace. So it's happening a bit longer than we expected and as much as we work at it, we are able to shorten it and make it more consistent and more understandable. It still takes time.

Speaker 8

Okay. And just to understand that as well. So if I'm looking at 4 to 6 months and where you were at the process earlier in the year, Has that process gotten shorter? Has it gotten more efficient for you? I'm just trying to understand we get to this time next year, do you think it would still be taking 4 to 6 months to get through a VAC process?

Speaker 2

So what I will say is we have a much better understanding of it. Do I expect it to get shorter? I do. One of the things that we realized as we launched into it, it's about a year at this point, we had not applied to a VAC of any regularity for more than 2 years. So it became a new skill and experience for our organization.

Speaker 2

So I do expect it to get shorter. Also I expect the number of accounts to diminish. At some level, if you take all trauma centers, you're in the order of, let me see something in the order of 700 to 7 50 accounts in the United States. And if you reverse back to where we currently are, we've got somewhere around 220, 230. We've got 85 in the pipeline for Q3.

Speaker 2

So we'll end the year well over 300, 3 quarter, 350 and mostly those are the bigger accounts. So there will come a time when penetration is the bigger name of the game. And one of the benefits of Resale Go is that, that makes it so much easier to adopt as you probably hopefully you saw the slides, if not I'll send them to you. But also the RisoGo Mini will be applicable to many more smaller full thickness defects. So in combination, those give us a lot of opportunity.

Speaker 2

And of course, many of them need a dermal matrix and all of them needed addressing like Permaderm.

Speaker 8

Okay. And previously you spoke about approval rates or essentially the rates that didn't approve or back communities didn't approve resell. Can you talk to us about that, what happened through the Q2 of 'twenty four and to the extent that there were any non approvals, have you gone back to them and did those change and become approvals eventually?

Speaker 2

Yes. We've had a very small number historically. We had no turndowns during the quarter, for example. And we have historically still had only 4 or 5 out of now nearly 200 ads. So it's a statistical, just unlikely event for us as we've learned.

Speaker 8

Okay. Thank you. And then, Permioderm sales. So are you able to give us an indication? I know it's still small, but for the 4th for the second quarter, how much of total revenue was Permian sales?

Speaker 3

Yes. We this is David. So thank you for the question. It averaged around 2% for the quarter. So very small amount in the second quarter.

Speaker 3

We see that picking up very substantially over the rest of the year.

Speaker 8

Okay. And then you mentioned you weren't adding any more headcount to your sales force in the United States. But I'm just trying to understand how much of your sales force time is currently spent promoting or selling resell versus PermudaDerm. I guess I'm trying to understand, yes, I think it's great that you've got a wider product of a wider wound portfolio. But could you perhaps have that sales force time more directed towards selling resale and getting that top line traction?

Speaker 2

Well, the fortunate thing around this strategy is, 1st of all, the center of our strategy is resale. So from a salesperson point of view or any person in the field's point of view, they basically get to sell in the moment, if I may put it that way. If you are covering a case with resell, resell is what is being trained on or coached or supported at that moment. Upon the application of resell, the next thing you do is you put a dressing on it, which is when you would promote cell PermudaDerm. The third thing you would do is we follow-up with our customers around aftercare.

Speaker 2

So using resell has some very important requirements around aftercare, so you don't change the dressing in a manner that disrupts the healing process. During the aftercare interaction, whether whoever you're talking to, that is when you get to talk about Permida Derm also. And if you apply that to our future dermal matrix, it will happen at the right after the debridement of the wound, that's when you use a dermal matrix. You then apply a split thickness skin graft combined with ReCell in the moment. And in the moment after that, you apply a dressing.

Speaker 2

So it doesn't they don't conflict with each other from a time point of view, same patient, same doctor, same procedure.

Speaker 8

Okay. Thank you. And just one last question around, if I think about costs over the next few quarters, you mentioned that there were going to be some clinical studies using the dermal matrix and resell. How should we be thinking about that in terms of additional cost?

Speaker 2

I think comparatively year over year, it won't cause a significant increase in cost because of course, we conduct clinical studies for example, TONE was one that we've been investing in which is now winding down from a cost point of view. And the size of these studies will not be greater and what we've reflected in the past because of course we did clinical research in R and D related to ReCellGo, then we did it related to ReCellGo Mini. Those will get replaced from an R and D point of view, which is where clinical goes in a similar fashion. We're not expecting a big uptick in expense.

Speaker 8

Okay, great. Thank you very much. I'll leave it there.

Speaker 3

Thank you, Leanne.

Operator

Thank you. This concludes the question and answer session. I would now like to turn it back to Jim Corbett for closing remarks.

Speaker 2

First of all, thanks all of you for attending the call. I appreciate the questions. We're looking forward to our future meetings, communications and next quarter's call to report our Q3 results. Thank you again.

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Earnings Conference Call
AVITA Medical Q2 2024
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