Avita Medical: New Debt Provides Breathing Room on Path to Profitability

We maintain our AUD 5.60 fair value estimate for no-moat Avita Medical AVH . Third-quarter 2023 commercial revenue grew 16% on the second quarter to USD 13.5 million, in line with our forecast and prior guidance. Gross margin also expanded to 84.5% versus 81% in the second quarter, largely tracking in line with our unchanged 83% full-year forecast. The firm reiterated its 2023 commercial revenue guidance of USD 51 million to USD 53 million, versus our unchanged USD 52 million forecast.

New funding from OrbiMed, a healthcare investment firm, provides considerable headroom for Avita to finance its development and commercialization of recently approved indications and reach profitability, without the near-term need of dilutive equity financing. OrbiMed has provided USD 40 million in new debt, with an additional USD 50 million in capital available at Avita’s option based on the achievement of certain revenue thresholds. Avita had USD 69 million in net cash and marketable securities as of June 30, 2023, versus a cash burn of USD 9 million in the second quarter of 2023. As part of the agreement, Avita issued OrbiMed a warrant to purchase 409,661 shares, or less than 2% of the company’s current shares on issue, at USD 10.98 per share, roughly 10% out of the money at current levels.

Shares appear undervalued. We expect Avita’s product pipeline and high gross margins to provide a path to profitability over the next three years. However, a quicker transition to profitability is unlikely, and we concede there is a wide range of potential outcomes based on the success of its pipeline which is reflected in our unchanged Very High Uncertainty Rating. We expect Avita won’t be cash flow-positive before 2026.