Medical company is a small cap with big potential


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Avita Medical (ASX:AVH),  a company which provides a novel approach to skin regeneration, is a business worth keeping tabs on.  Although its share price has felt the effects of the COVID-19 market sell-off, our positive view of the company has not changed.

For those unfamiliar with Avita, the company produces a medical device called RECELL, which produces a "suspension" of spray-on skin cells using a small sample of the patient's own skin to help treat burn patients and skin defects.

The primary purpose of RECELL is to treat patients with acute and severe burns with longer-term aspirations to penetrate other skin-related addressable markets such as wound care (trauma, ulcers) and vitiligo. The company has secured US Food and Drug Administration approval in the form of a pre-market approval for use of RECELL in its primary US market and is looking to conduct trials for new applications.

avita medical shares

Like most companies, Avita is unlikely to be immune from the broader impacts of coronavirus. While surgeries for burns are non-elective procedures, the company may see a reduction in burns incidents given stay-at-home orders in the US led to lower levels of activity.

There is also a re-shifting of focus of the US medical system to COVID-19 to preserve capacity for coronavirus patients.

The more obvious impact has been on AVH's efforts to ramp up burn centre coverage and product penetration within existing accounts given movement restrictions on its sales team. This will likely slow the trajectory of sales over the near-term. The company does however appear well positioned from a supply perspective with inventory on hand in case of disruption at its manufacturing facilities in California.

There has also been an impact on the pace of enrolment of investigational studies as resources are prioritised for coronavirus patients, which will delay results from pivotal trials in soft tissue reconstruction, paediatric patrial thickness and vitiligo feasibility.

While coronavirus in the US is undoubtedly a setback for the company, we expect these to be temporary in nature given RECELL's unique product proposition in terms of clinically proven benefits (significantly reduced donor skin requirements). Peer-reviewed studies have also supported RECELL's favourable cost-benefit profile for hospitals given reduced patient length of stay.

The key to RECELL's success will be surgeon acceptance (underpinned by clinical data), as well as a level of product reimbursement that promotes wide-scale adoption. For example, favourable outcomes on outpatient reimbursement will not only increase the addressable market, but greatly accelerate the trajectory of sales given a higher number of burns patients.

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Joseph Kim joined Montgomery Investment Management as a senior analyst in 2018 and in 2020 was promoted to the portfolio manager of The Montgomery Fund and head of fundamental research. He has more than 14 years' experience in equities research and funds management. Joseph holds a Bachelor of Applied Finance with a degree of Bachelor of Actuarial Studies from Macquarie University.