Avita Medical – a dog no longer?

Guest Post : Anne Austin


Editors note : The following post contains some positive sentiment. Regular Long Tail readers should take caution.


Avita Medical, (ASX : AVH; previous code CCE; and affectionately referred to here in Western Australia as the “Fiona Wood burns company”) has long been a dog of a company. It first listed in late 2002, at around $3.70. The price then shot to $5.90 but and then fell, bottoming out at 3c in 2009. For the last 10 years or so, it’s been more or less stuck in a 5 to 15c trading range. AVH has broken a lot of investor’s hearts but maybe AVH’s future is looking brighter, mainly because of Adam Kelliher! (he’s the guy in the photo with the waterlogged dog – well, not really, that’s just photoshop).

But first some background on AVH. Today AVH has a market cap ~ $55m, with an enterprise value ~ $44m (based on 527m shares @10.5c and  $11-12m of cash after this week’s capital raise.). Its product is called ReCell – a cell suspension device that treats burns, chronic wounds and pigmentation problems. This is ReCell in a nutshell (and also a good 2-minute video):

“ReCell is relatively simple to use; any medical practitioner can master it within an hour. Preparation is quick. Unlike cell culturing, which can take 30 days, ReCell takes about 30 minutes. We have positive outcomes. The product reduces scarring because the patient’s own skin is restored, substantially decreasing or eliminating the majority of issues of contracture that we typically see. Our product greatly reduces other treatment demands and the need for follow-up surgery.”

ReCell apparently works, at least over 60 peer-reviewed papers say so. AVH has approval to sell ReCell in Australia, Europe, Canada, China and Taiwan –  just about everywhere except the US although AVH is doing a pivotal FDA trial which is hopes will win it a coveted marketing approval in the US. To date, 19 of 30 patients been enrolled, with enrolment hopefully completed by the end of 2015. However the earliest FDA approval can happen is probably around 3rd quarter 2017.

Who is Adam Kelliher? 

He was “anointed” as AVH’s new CEO about six months ago and he is a pretty interesting guy. His first career was as a war correspondent for the BBC and The Times newspaper, which is sort of dashing really. Then he quit that to become an entrepreneur. He successfully started and sold two nutraceutical companies selling omega-3 and other high-purity lipids. After he’d sold up, he said was approached by lots of businesses wanting to harness his entrepreneurial knowhow, but nothing appealed until he checked out Avita medical:

“I was drawn to Avita Medical for some very simple reasons. First, it has world-class technology that delivers to very defined indications. Second, by virtue of its 12-year existence, it has a strong foundation of research and is already approved in major markets. Third, the team was bright, committed, and eager. Fourth, I could see that although the company had lost its way commercially, with a massive effort, it could be turned around.”

This comment by Adam, in his introductory announcement as CEO really caught my attention:

“My due diligence concluded that…the [ReCell] technology works… [and] there is no regulatory obstacle to us selling…In terms of requirement, this needed a straight commercialisation play. It does not require massive capital expenditure; say to build a proprietorial cGMP manufacturing plant, with all of those attendant joys. It required a rethink, and a redirection and a fresh approach to the market.”

Adam then explained why he felt the ReCell story needed to be told a better way using a new RESTM (Regenerative Epithelial Suspension) trademark:

“This new positioning is the result of an internal discussion about explaining the mechanism within our suspension. I wanted us to drill down, and explain why ReCell® works, as it was not clear to me from the messaging to date. We sell a device that enables medical professionals to make RES™, which is the real ‘magic’ being offered by Avita. The RES™ message allows us to communicate effectively across our various condition areas and emerging brands. We articulate that RES™ is Activated, Available, Autologous and Complete, to give some explanation to the mechanism.”

AVH certainly needed a brilliant communicator and marketer to take charge, and hopefully Adam is “the one”. Well, of course he is – he’s a former BBC correspondent! Certainly a lot of good things have happened since Adam took over six months ago (23 market-sensitive announcements actually!). The last four weeks have seen two major wins and a couple of minor ones:

1) BARDA funding worth up to $US54 m (~ $A74m) over five years. This money comes in two tranches: a first parcel of $US17m and a second parcel up to $US37m if all goes well. The initial funding  is  to be spent on completing the current US study trial and FDA approval process; later funds maybe spent on a post-approval surveillance trial and a paediatric trial. Initial funding will also pay  AVH to supply the US with 5000 ReCell device kits as their emergency stock pile; later funds may be allocated to increasing this stockpile to 20000 ReCell kits.Who is BARDA and why are they giving AVH money? Well, the US wants to be prepared in the event of public health emergencies, such as those caused by fire or explosions. It created BARDA (Biomedical Advanced Research and Development Authority) to provide funds to companies from anywhere in the world who are developing products that would be helpful in a disaster to help these companies get their products approved and in the market. BARDA heavily vets the companies it gives funding to, so receiving funding from BARDA is a great endorsement for AVH and ReCell. It’s a double-win: good for the bank balance and good for marketing.

2) Expanding the original CE Mark approval from just being allowed to treat burns to now being allowed to treat these three indications:

  • ReCell – for treating acute wounds such as burns.
  • ReGenerCell – for treating chronic wounds such as venous leg ulcers and diabetic foot ulcers.
  • ReNovaCell – for treating aesthetic problems such as pigmentation problems and scars.

(These are all the same ReCell product, but now each indication has its own product name. If that’s not clever marketing, I don’t know what is!)

3) The US Department of Defense has commenced its own study of ReCell, which it is funding. In this nifty little study each of the 20 patients with traumatic wounds will serve as his or her own control. The study will compare one bit of wounded body getting conventional meshed autographing incorporating ReCell with another bit of wounded body getting just the conventional meshed autographing. ReCell apparently makes an excellent treatment option on the battlefield:

“Each unit is entirely self-contained and it can be easily deployed to a battlefield hospital. No power cord is needed, nor do you have to keep it in a refrigerator.”

4) A paper has been published in a quality peer-reviewed journal reporting that ReCell treatment improved the appearance of the wound site in four patients having a deep skin cancer removed from their face. This is good news indeed:  People don’t want to be left with ugly, disfiguring scars after getting their skin cancers removed from their face.

And the good news flow looks set to continue.  Around the end of this year, UK researchers are expected to announce the results of a 52-patient study into venous leg ulcers. This study compared the outcomes from ReCell + standard wound dressings with standard dressings alone. Also by year end, hopefully AVH will announce that all 30 patients have been enrolled in the pivotal FDA trial.

But now for the bad news…

Unfortunately, ReCell revenue for 2015 was just $2.5m, which was much the same as for 2014. No hockey-stick growth to be seen here! Hopefully 2016 will be better. Some nice profit could be made if only they could sell more kits because ReCell’s gross margins are high at 73%! But hang on – BARDA has just ordered 5000 kits! Excellent!

1) FDA approval won’t happen until 3rd Q 2017. In the meantime, AVH must focus on drumming up business in all those countries outside the US. Unfortunately, ReCell treatment is expensive – possibly as high as $5000 a treatment – and reimbursement doesn’t seem to be yet forthcoming. What good is having a miracle treatment if it costs more than people can afford to pay? In a company presentation  in August, AVH said they were making good progress regarding reimbursement:

  • UK’s NICE is commissioning research into the value proposition of ReCell combined with mesh graft;
  • Eight hospitals in Germany have submitted  supporting documentation for reimbursement;
  • Turkey has  issued a reimbursement code and  has put ReCell on its list for consideration for  temporary reimbursement;
  • Australia, France and Italy are euphemistically in that  state in which : “the process is underway”I felt heartened by this.

But then I read the almost exact words in a company presentation in February 2014.  So it looks like not much progress is happening in winning reimbursement codes. In fact, obtaining reimbursement in Europe sounds really hard, as AirXpanders (AXP) CEO Scott Dodson explains:

[Securing] the CE mark is just the beginning of the commercialization process in Europe. “Then you have to establish a key base of users . . . unless you bring the right surgeons, prestigious surgeons, on board first than your traction is limited,” he said.

and…

A mistake many companies make after receiving CE mark is to rush into marketing the product in Europe. “A good bit of work has to be done upfront in order to understand the reimbursement landscape in each country,” he said. Reimbursement is just as important, if not more so, in international markets than it is in the U.S., Dodson said. The five key European geographies for medical device makers to think about are the UK, Italy, France, and Germany, plus the area of Belgium, the Netherlands, and Luxembourg (Benelux). “But each require a very separate effort . . . one can’t expect to be an over-night success,” Dodson said. “That makes those markets less ideal for smaller companies,” he said.

2) AVH hasn’t won any commercially significant partnerships yet, apart from the big BARDA deal. Winning such partnerships is apparently high on Adam’s agenda for 2016-7. Hopefully all that excellent networking Adam has been doing recently will pay off. He and other key execs have met with the Irish prime minister and high-ranking Washington officials, US military bigwigs, and industry leaders in regenerative medicine so perhaps some fruitful and unusual partnerships will happen.

3) The last capital raise left a bad taste. Pre-market 16 October AVH announced a trading halt. It was finalizing a capital raise at 9.3c. AVH’s previous trading price had been 12c. As a shareholder, I felt 9.3c  was rather low.  Then I read that

“Key investors are Hunter Hall International and One Funds Management Limited as Trustee for Asia Pacific Healthcare Fund II, which is managed by Bioscience Managers. Avita Directors Jeremy Curnock Cook and Matt McNamara are also executives and directors of BioScience Managers Pty Ltd.

I thought it was regarded as good practice for non-executive directors not to have financial dealings in the company they advised on so they could be totally independent in their advice. How then are Cook and McNamara solely looking after my interests as a shareholder if they are also buying shares in a capital raising where they may have had a say in the price of? For all I know they could have been flogging those 9.3c shares since trading resumed for between 10c and 11.5c.

[As an aside note: AVH has been totally upfront about this. They obviously don’t think it odd or off. But as a shareholder, I do. I’d be very pleased if someone could explain that I’m reading this all wrong. In fact, I don’t feel that impressed with the make-up of the board. Perhaps now is a good time to appoint some commercialization-savvy people who know how to trigger hockey-stick sales growth, rather than just do clever product branding].

4) And for my final bit of bad news… I decided to do a Google search on Adam. It’s painful to write about this. Just as soon as I’ve found a hero for AVH, I fear he’s died on me! I turned up these two articles:

How to avoid the bitter pill of regulation
The Trial That Ate Itself

Hmm…..maybe it’s possible to be too clever at marketing. As with everything else in life, there’s a golden mean: that magic place between not too little and not too much. Based on what the writers of these reports are saying, perhaps Adam’s fish oil company might have pushed clever marketing into the “too much”, squiffy, poor-ethics zone. Maybe the writers have misrepresented things.  I don’t know. It’s a judgment call. All I know is that as a retail investor, this is not the kind of thing that I wanted to read.

So where does this leave us?

All that bad news felt like a gloomy note to finish on. But then I brightened up because after all, ReCell isn’t scientifically unproven fish oil tablets. It’s got 60+ peer-reviewed papers saying it works! This simple formula came to mind:

A scientifically proven treatment

+   a strong unmet need
+   good marketing
+   an affordable price
+   doctor appeal
+   ethical behavior followed every step of the way (hopefully)

=  success for ReCell and  success for AVH as an investment.

Who knows? Maybe AVH will not only get rescued from its sea of despair but one day perhaps go on to win the “best in show” award.

Woof.

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All opinions expressed in this post are those of the guest poster. Where external references are made, reasonable effort is undertaken by the Editor-in-Chief to verify, but the Long Tail makes no representation as to the accuracy, completeness, currentness, suitability, or validity of any information in this post.

10 thoughts on “Avita Medical – a dog no longer?

  1. Hi Anne, many thanks for a nicely written, researched and argued article.

    I’m not sure if you were aware but NICE reported a Technology Guidance (MTG21) in November 2014 on ReCell.

    From the report looks to be a lot of hard yards ahead for the company to produce the evidence (particularly around cost effectiveness) for real progress here. But open to be convinced otherwise.

    All the best Southoz

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      • Yes I thought so too Chris.

        Adam Kelliher certainly has an interesting background. With a link (son in law) back to David Horrobin.
        Who became more famous in his death with a seemingly never ending debate in the BMJ around a rather unkind obituary.

        So my take is that Adam might be exactly what is required for marketing here. But it is for marketing a product that probably will not ever have conclusive evidence. And perhaps his appointment is acknowledgment of that.

        Yes agreed about NICE. Although you will never get two health economists to agree about how to model something. But one thing that is certain is that the health assessment business is a good one; particularly at the moment in Australia with the MBS Review.

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  2. Thank you Southoz for your kind words. And you too, Chris!
    I haven’t read the November NICE report, Southoz. I hate the word NICE: brings back tortured memories of waiting for a favorable NICE report to come out on Cellestis’s Quantiferon (TB test). NICE umm-ed and ahhh-ed and fussed and carried on while the weeks turned into months and then into years…

    It would be hard getting health economists to agree… reminds me of something Peter Lynch said in his book “One Up On Wall Street”:

    If all the economists of the world were laid end to end, it wouldn’t be such a bad thing….!!!

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    • I disagree. I think NICE has been a role model in many ways, and made some tough (and unpopular) calls that had to be made with respect to “precision” medicine. Andrew Dillon hasn’t been everyone’s best mate but I admire (and like) him – and the way he has held the pharmaceutical industry to a higher bar….

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  3. Bang on Southoz regarding the appointment of Kelliher. I wouldn’t call him a snake oil salesman but a proponent of interventions that are not weighed down by evidence. And I think that the Avita technology fits in that bucket.

    A great guest post, thank you Anne. Speaking of guest posts, is there any truth to the rumour that Martin Rogers will be penning the next guest post?

    Like

  4. Pingback: The fallacy of the CE Mark | The Long Tail

  5. Pingback: The Fallacy of the CE Mark (Revised Content) | The Long Tail

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