The standard of care for treating serious burns hasn't changed much in decades. When a large patch of skin is injured or missing, surgeons often turn to a skin graft.
A skin graft takes a device that looks like an apple peeler, removes a healthy patch of skin from a patient's body, and implants it onto the wounded area.
That leaves an individual with two large wounds that risk infection, scarring, and lengthy healing times. It's far from an ideal treatment.
Avita Medical (RCEL) wants to replace this older system with a simpler, more cost-effective procedure. It's well on its way, considering that more than 87% of U.S. burn surgeons are trained to use the company's novel device and over 80% of U.S. burn centers have ordered it.
And the Valencia, Calif., company's ambitions don't stop with burns. Over its technology platform Avita Medical wants to treat traumatic skin injuries, skin diseases such as vitiligo, and even aging.
Investors are expecting data from two clinical trials in the second half of 2022. The timing -- as well as the valuation and market opportunities -- makes this small-cap biotech my top stock to buy in August 2022.
What Does Avita Medical Do?
Avita Medical has developed a spray-on skin procedure powered by a medical device called ReCell. The product takes only a small patch of healthy skin from a patient, breaks it into individual cells, and then sprays the skin cells onto the patient's wound.
This enables as much as 80 times expansion -- in other words, a healthy patch of skin the size of a credit card could be used to treat a second-degree burn covering an adult patient's entire back.
The product's development in burns was funded by the U.S. government and currently sits in the nation's strategic national stockpile – just in case there's a major natural disaster or terrorist attack.
In 2018, the U.S. Food and Drug Administration granted ReCell the first new marketing approval in burns in more than 20 years.
The product has taken time to ramp up commercially, owing primarily to the relatively small size of the U.S. burn market and the nitty gritty of regulatory approvals. For example, the product has been used only in special burn centers and for certain types of burns to date. That could soon change.
Avita Medical earned sweeping approval in 2021, enabling ReCell to treat burns of any size in adults and children. More important, the company earned a new payment code from Medicare that could allow the procedure to be used in broader treatment settings, such as hospitals.
The company announced a distribution partnership with Premier Inc. (PINC) that could provide more than 4,400 hospitals and 225,000 medical treatment centers with access to spray-on skin cells.
The Medicare payment code and distribution deal with Premier will help tap into the nearly $260 million serviceable addressable market opportunity treating burns in the U.S. (SAM is the total addressable market opportunity that can be realistically achieved.)
By comparison, Avita Medical expects to generate $30 million in revenue in 2022. That could grow quickly if ReCell earns approvals beyond burns in 2023.
Can Data Readouts Drive Growth?
Avita Medical expects to report data from two clinical trials in the second half of 2022.
- One trial is exploring the use of spray-on skin cells to treat soft-tissue injuries from traumatic accidents or infections. This indication has a SAM of $450 million. Importantly, soft tissue injuries are often treated in burn and trauma center, where ReCell is already being used. That could lead to a quick commercial ramp if it earns approval.
- The other clinical trial aims to prove that ReCell can be used to treat stable vitiligo, a skin disorder characterized by a loss of pigment in patches of healthy skin. This indication has a SAM of $750 million.
Management expects to submit regulatory applications for each indication by the end of 2022, which could lead to FDA approvals by the end of 2023.
Although clinical trials are often accompanied by risk and uncertainty, ReCell has a relatively high probability of success. That's because the device has already earned international approvals in burns, soft-tissue injuries, vitiligo, and chronic wounds. The ReCell product has treated more than 15,000 individuals across these indications to date. Investors can be reasonably assured that the procedure works.
A caveat: The clinical trials are not a slam dunk. The stable vitiligo study is small, which could yield mixed results in the eyes of regulators. That risks a redo of the clinical trial, delaying an important indication by years.
With that, the business has multiple tailwinds.
Avita Medical expects to soon expand into Japan through a commercial partner.
In addition, Avita recently earned FDA approval for a second-generation device that's easier to use, received financial help from the U.S. government for its clinical trial in soft-tissue injury, and can piggyback on the recent FDA approval of Incyte's (INCY) Opzelura in vitiligo to a larger market opportunity for ReCell.
A Hidden Gem for Growth Investors
Avita Medical has been battered in the biotech correction. Then again, few stocks were spared. But Wall Street might be overlooking an attractive opportunity.
The business has a relatively smooth path to generating as much as $50 million in revenue in 2023, which might be possible without additional regulatory approvals. Sales could hit $100 million a year by 2025 in a best-case scenario.
Meanwhile, a gross margin of 80% and low overhead suggests the business could be self sufficient by the middle of the decade if all goes well.
A combination of low valuation risk, a value-creating product, two potential approvals in the next 18 months, and exceptional growth potential in the next three years make this my top stock to buy in August 2022.
