Avita Medical’s (ASX: AVH) second-quarter sales were flat on the first at USD 18 million, with full-year guidance cut by 24% to USD 79 million. While net loss reduced 29% sequentially to USD 10 million, cash burn didn’t improve. Shares are down 14% on the result.

Why it matters: Sales were weaker than we expected, and we cut our revenue forecasts by 13% on average over the next two years. However, we leave our long-term estimates broadly unchanged as we view the current headwind of reimbursement delays as largely temporary.

  • Many users of Recell weren’t being reimbursed, impacting demand. A change in January gave insurers the responsibility to set rates and led to a six-month backlog in unpaid reimbursements. However, insurers began payments in July, and we expect full demand to resume in the second half.
  • We expect stronger growth through the year, driven by recent product launches that allow broader usage, and international expansion in Europe and Australia in the fourth quarter. Avita’s guidance implies a 13% stronger second half as reimbursement resumes and the adoption of its products progresses.

The bottom line: We cut our fair value estimate for no-moat Avita by 8% to AUD 3.85 due to our lower forecast revenue and an assumed equity raise. Shares are undervalued as we expect Avita to be cash flow-positive by the second quarter of 2026, in line with management’s revised expectations.

  • To our surprise, the cash burn of USD 10 million didn’t improve, with USD 16 million in net cash and marketable securities as of June 30, 2025. We now assume Avita raises through a prior agreement, which allows the sale of up to 3.8 million shares to TD Cowen, or 14% of the current shares on issue.
  • The long-term opportunity remains attractive. Recell proves it accelerates recovery, reducing hospital stays by 36% from real-world analysis of the national burn registry over five years. Based on this data, Avita is winning contracts by offering a rebate if patients stay longer than expected.

Avita’s road to profitability is in sight

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

Despite the technology in Avita’s RECELL system being in use since the Bali bombings in 2002, the product has had limited commercial success as it entered the market as an investigational device. This limited the reimbursement and take-up of the product. RECELL relaunched in the US following randomized clinical trials and Food and Drug Administration approval in late 2018. Currently, it’s approved for treating second- and third-degree burns in paediatric and adult patients.

The treatment of severe burns in the US is concentrated across the 136 burn centers, making commercial rollout of RECELL straightforward. Of the approximately 14,000 adults with second- or third-degree burns treated at these burn centers each year, we estimate Avita could ramp up to 34% share or 4,800 patients per year by fiscal 2026. The cost of RECELL compares favorably with a skin graft in this setting, as RECELL has a list price of USD 7,500 per single-use unit versus the USD 17,000 to USD 20,000 cost of a skin graft. It also has the benefits of shorter length of stay and fewer additional procedures.

Outside of burn centers, the opportunity set is far more fragmented and because the burns are less severe, the cost of skin grafts average USD 2,000. As such, we expect limited take-up outside of burn centers, reaching 3% by fiscal 2031. Avita has received regulatory approval for an updated RECELL device that makes handling easier in a regular hospital environment. We expect the company will seek to justify reimbursement on a holistic cost of treatment and roll out the updated version in second-half fiscal 2022.

Avita bulls say

  • We view Avita’s RECELL system as a sound alternative treatment for large second- and third-degree burns treated in burn centers. It compares favorably on price and ease of use with new products and the existing standard of care being skin grafts.
  • The company requires little invested capital and is expected to generate very high returns once it ramps up its commercial roll-out.
  • RECELL has achieved an estimated 20% market share in fiscal 2021 in its key addressable market since launching in 2019 and set to expand its use for other indications.

Avita bears say

  • Avita is still burning cash and the road to profitability depends on clinical readouts for further indications over the next few years, with the use of RECELL currently limited to adult and paediatric patients at burn centers.
  • The RECELL system is an assembly of tools with the only significant item being the vial of enzymes, so the effective price for the vial at a list price of USD 7,500 could be challenged by reimbursers.
  • The existing patents do not provide extended cover as expiries range between 2024 and 2034, and the very high gross margin of over 80% could come under pressure.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.