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Why the Avita Medical share price rose 480% in a year

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One company that recently caught our attention is Avita Medical (ASX: AVH).

The company owns the patents for, and 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 burns and skin defects.

The company has been listed since 2002 but has suffered numerous setbacks to commercialisation.

A major turning point appears to have occurred in 2015, when Avita secured significant funding from the US Biomedical Advanced Research and Development Authority (BARDA) to help fund development efforts to secure pre-market approval for RECELL by the Food and Drug Administration (FDA) in the US.

avita medical avh stock shares asx

In September 2018, Avita received FDA approval for the use of RECELL to treat patients over 18 with acute and severe burns, paving the way to commence commercial activities in the largest burns market.

To understand the benefits of the RECELL device, it is important to look at the clinical trial results.

They have demonstrated improved patient outcomes including shorter length of stay, reduced pain and better cosmetic outcomes (less scarring), while hospitals have benefited from lower treatment costs and improved productivity.

Last month RECELL was showcased in numerous presentations at the major American Burn Association conference in the US, which featured analysis of significant cost savings for Avita's target patient market.

The increased awareness of the product should help drive adoption in a market that is relatively concentrated (134 burn centres, 300 burn surgeons) over the next few years.

While Avita's initial target market appears to be somewhat limited (estimates of $US200 million, or $290 million, based on burn centre inpatients in the US), there appear to be additional opportunities for application of the RECELL technology.

There are various stages of trials and development, including:

  • Approval for use for paediatrics, where trials commenced in late 2018. Avita has already used the device on paediatrics in previous trials for compassionate use.
  • Chronic wounds, including venous leg and diabetic foot ulcers.
  • Hypopigmentation - vitiligo and scars
  • Trauma wounds.

There is also the opportunity to partner with other companies to penetrate new geographies (as evidenced by its recent deal with Cosmotec in Japan).

Investors seem to be excited about Avita, with a share price appreciation of 480% in the year to May 20.

This rise follows the release of a report updating the market on the RECELL system for the treatment of inpatient burns as cost-saving or cost-neutral with a reduced length of hospital stay.

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Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.
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