Skin in the Game: This Small Biotech Has a Lot of Potential

Skin in the Game: This Small Biotech Has a Lot of Potential ...

The standard of care for severe 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 is a device that looks like an apple peeler, that removes a healthy patch of skin from a patient's body and implants it onto the injured area.

That leaves an individual with two large wounds that are at risk of infection, scarring, and lengthy healing times. It's far from an ideal therapy.

Get Avita Medical Inc. Reportwants to replace this older system with a simpler, more cost-effective procedure. It's well on its way, considering that more than 87 percent of U.S. burn surgeons are trained to use the company's innovative device and over 80% of U.S. burn clinics have ordered it.

The ambitions of the Valencia, Calif., business extend beyond burns.Over its technology platform,Avita Medical intends to treat traumatic skin injuries, skin diseases like vitiligo, and even age.

In the second half of 2022, investors are expecting results from two clinical studies. This small-cap biotech is my top pick for sale, as well as the valuation and market opportunities.

What Is Avita Medical's Role?

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 sprays the skin cells onto the patient's wound.

This expansion technique can be extended up to 80 times. In other words, a healthy patch of skin the size of a credit card might be used to treat a second-degree burn covering an adult patient's whole back.

The development of the burns product was funded by the US government and is currently stored in the country's strategic national stockpile in the event of a major natural catastrophe or terrorist attack.

The Food and Drug Administration of the United States gave ReCell the first new marketing authorization for burns in over 20 years.

The product has taken some time to commercialize, owing primarily to the relatively small size of the U.S. burn market and the complex regulatory requirements. For example, the product has only been used in special burn centers and for certain types of burns until now. That might soon change.

ReCell can treat burns of any size in adults and children, and the company received a new payment code from Medicare that might allow the procedure to be utilized in other healthcare settings, such as hospitals.

Get Premier Inc. Reportthat could provide more than 4,400 hospitals and 225,000 medical treatment centers with access to spray-on skin cells.

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The Medicare payment code and distribution arrangement with Premier will help tap into the nearly $260 million serviceable addressable market opportunity treating burns in the United States. (SAM is the total addressable market opportunity that can be realistically achieved).

Avita Medical forecasts $30 million in revenue in 2022. It could grow rapidly if ReCell receives approval beyond burns in 2023.

Is It Possible to Use Data Readouts to Drive Growth?

In the second half of 2022, Avita Medical anticipates to disclose data from two clinical trials.

Management expects to submit regulatory applications for each indication by the end of 2022, which might lead to FDA approvals by the end of 2023.

ReCell has a relatively high probability of success in clinical trials, although they may be accompanied by risk and uncertainty. This is because the product has already received international certification in burns, soft tissue injuries, vitiligo, and chronic wounds.

The clinical studies are not a slam dunk. The stable vitiligo study is small, which may yield mixed results in the eyes of regulators. That risks a redo of the clinical study, delaying an important indication by years.

With that, the business faces many tailwinds.

Avita Medical expects to expand into Japan soon via a commercial partner.

Avita recently received FDA clearance for a second-generation device that's simpler to use, government funding for its clinical study in soft-tissue injury, and can piggyback on Incyte's (INCY) recent FDA approval - Get Incyte Corporation ReportOpzelura in vitiligo to a larger market opportunity for ReCell.

Growth Investors Have a Hidden Gem

Avita Medical has been battered by the biotech crash. However, few stocks have been spared. But Wall Street may be overlooking an attractive opportunity.

In a best-case scenario, the business has a relatively smooth path to reaching $50 million in revenue in 2023.

Depending on how things go, a gross margin of 80 percent and low overhead suggest that the business might be self-sufficient by the middle of the decade.

This is my top stock to buy in August 2022 due to its low valuation risk, high value-creating technology, and excellent growth prospects in the next three years.

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