AVITA Medical Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Aveda Medical 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jessica Ekberg, Director of Investor Relations.

Speaker 1

Thank you, operator. Welcome to Aveda Medical's 4th quarter and full year 2023 earnings call. Joining me on today's call are Jim Corbett, Chief Executive Officer and David O'Toole, Chief Financial Officer. Today's earnings release is available on our website, www.avenamedical.com, under the Investor Relations section. Before we begin, let me remind you that this call will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward looking statements. Please review our most recent filings with the SEC, specifically the risk factors described within the Form 10 ks for the year ended December 31, 2023 for additional information. Any forward looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Jim for his comments.

Speaker 2

Thank you, Jessica. Good afternoon and thank you for joining us today. I will begin today's call by discussing our financial and business highlights of the Q4 full year 2023, followed by an update on our priorities for 2024. Following this update, I will turn the call over to David, who will provide commentary on our 2023 financial performance and 2024 guidance before opening the call to Q and A. During the February 2023 conference call, I outlined our 2023 priorities, our growth strategy and committed to providing quarterly and annual guidance.

Speaker 2

Additionally, I emphasize that 2023 would mark a significant turning point for Aveda Medical, a year in which we plan to transform our business by adding multiple new indications dramatically increase our growth trajectory. I'm pleased to report we did just that. We finished 20 23 strong, delivering 4th quarter commercial revenue of $14,100,000 representing growth of 50% over the same period in 2022. This performance highlights our sustained quarterly growth trajectory. For the full year of 2023, we closed with commercial revenue of $49,800,000 representing impressive growth of 46% over the prior year.

Speaker 2

This is a significant achievement reflecting the effectiveness of our strategic growth initiatives and initial launch of full thickness skin defects, which I will address shortly. Shifting focus to our recent developments. On January 10, we announced that we entered into an exclusive 5 year distribution agreement with Stedicle Medical to commercialize Permioderm biosynthetic wound matrix in the United States. Permioderm is a transparent, flexible dressing that is cleared by the FDA for use in the treatment of a wide range of wound types until healing is achieved. PermioDerm's high level of permeability and flexibility allow medical professionals to stretch it, giving the clinicians the ability to customize the porosity to meet the specific needs of the wound.

Speaker 2

This adjustability facilitates wound healing. Moreover, Permioderm can be used alongside the treatment of many of our burn and full thickness skin defect cases to further aid in healing. The complementary nature of these two products and overlapping call points allow us to leverage our commercial organization to effectively integrate Permida Derm into our selling portfolio. Our commercial organization will launch Permida Derm during March and we will update you on this effort during our Q1 call after we have had some experience selling to our customers. The partnership marks the first step in our efforts aimed at expanding our portfolio of wound care products that will facilitate wound treatment.

Speaker 2

Moving on to our international expansion strategy. Last quarter, I unveiled our plans to expand into Australia and most of the European Union through 3rd party distribution partnerships. I'm happy to report that Polymedix, our 1st European distributor, completed their resell training and launched within Germany, Austria and Switzerland in January as expected. Will continue to update you as we identify new distributor partnerships. Turning to the PMA supplement for RESEL GO.

Speaker 2

We have completed the in house testing that was necessary to fulfill the FDA's request for additional information. As previously stated, we expect to submit our response to the FDA on February 28, 2024, with the restart of the 180 day real time review we plan to launch on May 31, 2024. Moving on to the manufacturing and assembly of Resell Go. We mentioned during our last call that we made the strategic decision to bring the entire manufacturing and assembling process of both the durable and disposable components in house to our Ventura facility. We will also be completing a service center for the durable that will be located in Ventura.

Speaker 2

We are on track to complete this transfer ahead of the May 31 launch of Resell GO. As part of the in sourcing process, we have been renovating our Ventura facility to increase capacity by tenfold. This expansion will allow also facilitate Permiederm distribution. With our Ventura facility serving as the hub for housing and distributing Permiderm to our customers along with our other products. As a result of this expansion, we will have ample space for manufacturing and assembly as well as physical distribution, ensuring efficient operations for the next 5 years of dislocation.

Speaker 2

These renovations are being completed in phases throughout 2024 with the final phase scheduled for completion during the Q3. While we work to enhance our operational capabilities to fuel our growth, we are also focused on the next expansion of our commercial fuel organization. Our primary objective during our first commercial organization expansion, which occurred in the early half of twenty twenty three, was aligning our sales strategy with our overall growth strategy by focusing on adoption and new cases for our new indication of full thickness skin defects. To achieve this, we strategically increased both our sales team from 30 to 70 people and our territories from 14 to 40 to maintain small sales territories and keep our growth rate high. Specifically, we aimed for our 40 territories to average under $2,000,000 to facilitate effective coverage, penetration and growth.

Speaker 2

We should be approaching the $2,000,000 threshold during the latter half of twenty twenty four. And therefore, our plan is to expand our sales force and territories again to keep the focus on adoption and growth. Moreover, an expanded sales force will allow us to intensify our efforts in the value analysis committee process, thereby maximizing our ability to capitalize on the expanded label of full thickness skin defects. Consequently, we are adding 38 new positions to our commercial organization, which will bring our commercial organization to a total of 108. We expect our expanded set field team be in place by April 1.

Speaker 2

With our current commercial field organization and our expanded sales force, we expect to add approximately 200 new accounts during 2024. As we discussed during our Q3 call, the broadened scope of full thickness skin defects provides us with an opportunity to pursue many different applications for resell. As part of this pursuit, we must access multiple physician specialties within a single facility to get value analysis committee, also known as VAC approval, resulting in a lengthier sales process. We continue to affirm this expanded indication increases the patient population of resell by 10 times over the patient opportunity with burns. In line with the expanded label of full thickness skin defects, we are in the design stage of developing ReCell Go Mini.

Speaker 2

ReCellGo Mini is being designed to address smaller wounds, providing us with the opportunity to treat patients with less than 5% total body surface area affected. This device will have the same reusable durable as ReCell Go will have a different cartridge that accommodates a smaller donor skin sample. We intend to submit a PMA supplement in order to achieve FDA approval by year end. Now turning to the vitiligo initiative. In January, we completed enrollment of 109 patients in TONE, our post market study evaluating repigmentation and its impact on the quality of life for vitiligo patients earlier than anticipated.

Speaker 2

Our initial 6 month follow-up assessments are scheduled to begin in July. To strengthen the data we are collect that we are collecting, we have extended the follow-up period to include an additional assessment at 12 months post treatment. We expect to submit both this study and our separate health economic study for publication by the end of 2024. The study dates position us to begin commercial payer coverage discussions during the Q2 of 2025. Subsequently, we anticipate a phased rollout of commercial coverage on a regional basis, with the initial phase likely to begin in the Q4 of 2025, supported by an appropriately sized commercial organization as coverage is established throughout the United States.

Speaker 2

Before turning the call over to David, I would like to address our financial outlook. I previously committed to communicating the quarter in which we achieved cash flow breakeven and GAAP profitability. We are pleased to report that we have established a path to achieve both milestones no later than the Q3 of 2025. In closing, 2023 marked an exciting inflection point for us and our dedication to innovation and growth continues. We remain resolute in our commitment to unlocking shareholder value through increased adoption and sustained growth within our indications and expansion of our portfolio.

Speaker 2

I look forward to sharing further updates on our continued progress. With that, I'd like to turn the call over to David.

Speaker 3

Thank you, Jim. We continue to deliver strong financial results. In the 3 months ended December 31, 2023, our commercial revenue increased to $14,100,000 $4,700,000 more than the $9,400,000 in the same period in 2022. Since Q1 of 2023, we have demonstrated sustained impressive commercial revenue growth rates of 40%, 42%, 51%, concluding the year with a Q4 growth of 50% compared to the same quarters in the prior year. Our strong 3rd and 4th quarter results were largely driven by 3 key factors.

Speaker 3

First, we were able to capitalize on our pre existing burn center accounts, of which half also have trauma centers, enabling us to immediately market full thickness skin defects in those centers, thus boosting sales. 2nd, we have received back approval on a number of new accounts. And lastly, we continue to benefit from increased adoption in the burns market. Gross profit margin for the quarter was 87.3% compared to 86% in the same period in 2022. This significant increase in gross margin was driven by the increase in sales and production of our product.

Speaker 3

As we have discussed previously, as production and sales increase, we benefit from the fact that approximately 50% of our cost of goods sold is fixed, representing the cost of the facility in Ventura. Total operating expenses for the quarter were $24,700,000 compared to $15,000,000 in the same period in 2022. The increase in operating expenses is primarily attributable to an increase of $2,400,000 in G and A expenses related to stock based compensation, consulting expenses and employee related costs. Additionally, we incurred an increase of $3,400,000 in R and D costs, which was primarily due to employee compensation costs, including recruiting costs, accelerated recruitment and third party costs associated with the TONE study and costs associated with insourcing RESEL GO production to our Ventura facility. Lastly, sales and marketing expense increased by $3,900,000 primarily due to employee related costs, including commissions, travel and promotion expense as a result of the expansion of our commercial organization in the Q2 of 2023.

Speaker 3

For the full year ended December 31, 2023, our commercial revenue increased by 46% to $49,800,000 compared to $34,100,000 in the same period in 2022. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts along with the launch of full thickness skin defects through our expanded commercial team. The gross profit margin for the full year was 84 point 5% compared to 82% in 2022. The gross profit margin for the year was at the higher end of our full year guidance of 83% to 85%. Total operating expenses were 86 point $4,000,000 compared to $59,100,000 in the same period in 2022.

Speaker 3

The increase in operating expenses is largely attributable to an increase of $15,400,000 in sales and marketing costs as a result of the expansion of our commercial organization in the first half of twenty twenty three. Alongside this expansion, G and A costs increased by $5,000,000 due to the increased headcount and related salaries and benefits, stock based compensation, consulting fees and recruiting costs. Lastly, R and D cost increased by $6,900,000 primarily driven by the cost of the TONE study, final work and completion of the PMA supplement to the FDA in June of 20 23 for Resell Go and employee related costs, including stock based compensation. Net loss for the Q4 was $7,100,000 or a loss of $0.28 per share compared to a net loss of $5,400,000 or a loss of $0.21 per share in the same period in 2022. Net loss for the full year 2023 was $35,400,000 or a loss of $1.40 per share compared to a net loss of $26,700,000 or a loss of $1.07 per share in the full year 2022.

Speaker 3

As of December 31, we had cash, cash equivalents and marketable securities of $89,100,000 compared to $86,300,000 as of December 31, 2022. During our Q3 conference call, I discussed the credit agreement we entered into with OrbiMed on October 18. As a reminder, dollars 40,000,000 of the total $90,000,000 debt facility was funded at closing. As we have discussed previously, we do not at this time foresee a need for either of the remaining $25,000,000 tranches before they expire at the end of this year. With our current cash balance of $89,100,000 as of December 31, and our expectations of reaching cash flow breakeven no later than the Q3 of 2025, we are confident that we have sufficient cash reserves to achieve our goals.

Speaker 3

Turning now to our 2024 guidance. For the Q1 of 2024, we expect commercial revenues to be in the range of $14,800,000 to 15,600,000 dollars This reflects a growth rate between 42% 50% over the same period in 2023. Our annual revenue guidance for 2024 is expected to be in the range of $78,500,000

Speaker 4

to $84,500,000

Speaker 3

which would reflect growth between 57% 69% compared to the full year 2023. Lastly, during the Q4, we made the decision to reorganize our corporate structure and wind down our legacy foreign subsidiaries to improve the efficiency of our operating and reporting structure. Due to the limited business operations of the foreign subsidiaries, the net impact of the restructuring was a 9,400,000 dollars foreign exchange gain or previously deferred unrealized cumulative translation adjustments in equity. This $9,400,000 non cash gain was recorded in other income expense on the statement of operations. We expect the restructuring to be completed no later than the Q3 of this year, at which point our primary operating company, Avita Medical Americas LLC, will be a wholly owned subsidiary of Avita Medical Inc.

Speaker 3

And no foreign subsidiaries will exist. With that, we thank you for joining us. And now I will turn the call back to the operator for your questions.

Operator

Thank Our first question comes from Brooks O'Neil with Lake Street Capital Markets. You may proceed.

Speaker 4

Good afternoon, guys. Congratulations on the terrific progress. I have a couple of questions. I guess, first, I would love to get any color you can offer about the experience you're having with the hospital VAC. And then maybe you could just tell us a little bit about the experience you see if you get VAC approval, getting procedures performed by the surgeons in those hospitals?

Speaker 2

Hey, Brooks. Thanks very much. So first, let me describe the experience we're having. And very broadly speaking, we have well over 100 hospitals in some stage of the back process. What we're experiencing is frankly a longer cycle time related to the broader label.

Speaker 2

So we're in most cases needing to involve 3 or 4 physician specialties and as many as 10 different indications and of course their commensurate DRG or reimbursement. So the complexity has unfortunately it's a little bit like a wave coming ashore. There's a lot of them and we've been at it now 2 quarters. So they are starting to splash ashore and that's a good metaphor because everybody's happy when that happens. But the experience we're having is it requires a more intense selling process.

Speaker 2

And one of the reasons we moved up during the year, our sales expansion is so that we could take advantage in real time and more rapidly that broader label. Because you've got to in one sense, keep in mind that on a patient level, 35,000 resale eligible burn patients, but nearly 400,000 resale eligible full thickness skin defect patients. So it's really worth it for us to penetrate these hospitals. And we're getting experience in cases that we haven't seen treated before and having very good clinical results. So we're really feeling very good about the progress we're making.

Speaker 2

So during the year, to answer the obvious, we expect to add approximately 200 new accounts.

Speaker 4

Great. That's very helpful. So perhaps we could just talk a little bit about any progress you feel you're making capturing some of the incremental burn activity within the level 1 and level 2 trauma centers you're beginning to call on?

Speaker 2

Well, certainly we are. That is our lead clinical data and our lead clinical experience commercially over the last few years. We find them in the level 1 trauma centers. And the physicians typically are well aware of resell because they go to burn meetings. They just were not reached by our sales coverage model in prior years.

Speaker 2

So we're getting progress in those instances and much more to get as you because that that VAC becomes more complex, right, as I was describing earlier. So we are but we are seeing those cases.

Speaker 4

Great. Let me just ask one more. I appreciate all the color. Obviously, last year, you had a substantial expansion of the sales force and now we're embarking on a second expansion. Can you just talk a little bit about, let's call it, your experience with the first expansion and your confidence that you can find the right people to complete the 2nd expansion?

Speaker 2

Well, I can tell you, on January 18, I was at our national sales meeting in Dallas, where we celebrated and did the very common awards for the sales team. And what was really impressive is how many of them have become really successful and have great momentum in their territories. And at

Speaker 3

the same

Speaker 2

time, our experience has been that we have the ability to really make the expansion happen rapidly because we are growing and we have a proprietary technology and it's a technology and company that for the sales rep really creates a special opportunity. We may be we initiated the sales expansion after that national sales meeting and we expect to be complete hiring by the end of March. So that is a indirect indicator of the demand that exists in the marketplace to come to work for Aveda.

Speaker 4

That's fantastic. Thanks for the color and congratulations on the terrific results.

Speaker 2

Thanks Brooks.

Operator

Thank you. One moment for questions. Our next question comes from Josh Jennings with TD Cowen. You may proceed.

Speaker 5

This is Eric on for Josh. Thanks for taking the question. Within guidance for 2024, could you help us understand what you're assuming for some of your different growth opportunities here? Thinking the launch of full thickness and Resil Go, how much of the growth in 2024 do you think these opportunities will account for?

Speaker 2

Well, first of all, our guidance anticipates growth of between 57% 69%, so substantial growth. Resell GO will essentially replace the resale manual system. So it's not quite it's not quite very it's not very easy to separate them because we so go the durable will not actually create a sales dollar by itself. The disposable that and cassette that goes with it, that processes and disaggregates the skin will replace the resell kit. So from an assumption point of view, it is really driven by resell penetration into full thickness skin defects.

Speaker 2

That is the really big growth area. We continue to gain share in the core burns business, But in time, that will become the minority of our total business relative to full thickness skin defects. So when we I mentioned earlier that we expect to add approximately 200 new accounts during the year, the principal sales of those will all be not all, but by vast majority of beef full thickness skin defect cases. So that's the real driver. Is that helpful?

Speaker 5

That is. Yes. Thank you for that color. And then maybe thinking internationally, should we be thinking of contributions from Europe and your distribution partners there? Is that a real driver for 2024?

Speaker 5

Or is that something that might take a little bit more time and maybe we should be thinking 2025? Thank you for the questions.

Speaker 2

Yes. Well, regarding international, as we mentioned, we've signed our 1st European distributor, which is covering the countries of Germany, Austria and Switzerland, the company is Polymedix. Now they have been trained and they've done their they started their initial launch and have had initial cases. We think that the volume will build through the year though, however, because just like any sophisticated market these days, similar as in the United States, they don't have exactly a vac committee. They have something equivalent though.

Speaker 2

So we'll be adding additional distributors in other European markets throughout the year. Our goal is to finish the year with Europe largely covered. We will be making contributions and projections as we get a little momentum behind us and understand the demand pattern that's going to emerge from, in this case, Germany, Austria and Switzerland. And we will update our guidance in that with that in mind. But 2024 will be the year to get the foundation in place of all our distribution partners and 25% will be where I think we see material revenue.

Speaker 5

Okay, that's perfect. Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Matthew O'Brien with Piper Sandler. You may proceed.

Speaker 6

Hey, this is Phil on for Matt. Thanks for taking our questions and congrats on all the progress. I guess just for starting on guidance, appreciating that guidance is back half weighted. Do you expect an inflection as you start to knock down some of these backs or is it going to be more measured? Like just any color on cadence as guidance implies a reacceleration of growth off more difficult comps?

Speaker 2

Well, actually there's a couple of drivers. The back approvals that we're receiving here in Q1 and that we will receive in Q2 will be more fully productive during the second half. So that's a reflection and anytime you convert a new account, you get increased adoption over the coming year following. So that is incorporated. We also are expecting as you learned earlier that Resell Go will launch May 31.

Speaker 2

And Resell Go will replace our manual resale and will make cases easier to do, require less clinical support. So there's no direct sales tied to resalegal per se, but the conversion of our business to using resalego as our delivery vehicle does reduce the training requirement for the customer and for our sales organization and inevitably will cause higher productivity. So those are rather core assumptions in our model.

Speaker 6

Thank you. That's helpful. And then I guess as a follow-up, can you talk about your strategy when it comes to filling the bag with additional products, specifically as it relates to medical scientific and maybe any other products that you feel Aveda will need down the road?

Speaker 2

Yes, sure. Well, what our mission is, is to help the patients and physicians that use our products and have our products used on them. And with resell, we have a real opportunity because we have a very well proven at this point technology that does not have a direct competitor. And we are in cases with these patients who have very significant injuries and wounds. And there's other products that surround the use of resell that we can bring and support our customer with and help solve their clinical problems.

Speaker 2

So PermioDerm is an example of that. The wound matrix is porous, it's see through, it's much more convenient to manage the wound with, for example. It can be used in some cases in conjunction with resell and in many cases, it will be used on its own. So it is a meaningful from a technical point of view, it's a call point overlap of almost a full Venn diagram. There are other products that are similar.

Speaker 2

I think the dermal scaffold is a very important technology for us to invest in and we've been researching that field and expect that to find a suitable technology in the coming year. So I think there are there may be there's likely others that overlap this call point and overlap this patient population and physician population. And we are going to really develop our company into a broader wound care acute wound care company.

Operator

Thank you. Thank you. One moment for questions. Our next question comes from Ross Osborne with Cantor Fitzgerald. You may proceed.

Speaker 6

Hey guys, congrats on the progress and thanks for Maybe just one for me on ResilMini. Will you just spend some more time on the rationale for developing this product and why Resell Go may not be as attractive for smaller wounds?

Speaker 2

So Resell Go thanks for the question, Ross. I understand what you're asking. So let me walk you through. So resalego replaces the manual resale kit and that resale kit covered 1920 square centimeters, which is about 10% TBSA. What we find in full thickness is that a very significant portion of the cases the patients have the physicians have, excuse me, are under 500 Square Centimeters.

Speaker 2

And it's very simple that to the customer, to the surgeon using a product that's designed for 10% TBSA to treat some wound that is under 5% TBSA doesn't quite make sense to them. It seems wasteful. So what we what the reason we'll have RESEL Mini, so RESEL Mini is merely a cassette that has less tissue volume than the RESEL GO! Standard cassette. So they'll both fit into the RESEL GO!

Speaker 2

Durable. And if you're treating a smaller wound, you'll use RESEL Mini. If you're treating a larger wound, you'll use the ReCell Go standard. Is that helpful?

Speaker 6

Yes,

Speaker 7

very helpful. Thanks for taking the

Operator

questions. Thank you. One moment for questions. Our next question comes from Ryan Zimmerman with BTIG. You may proceed.

Speaker 7

Good afternoon. Thanks for taking the questions.

Speaker 2

Hey, Ryan.

Speaker 7

I wanted to ask about the assumptions kind of underpinning your long term profitability comments. I know it's a little too early to guide for 25, but maybe help bridge us from here to there and kind of either what the revenue levels are or what the expense how the expenses kind of track in your mind to get there, especially in the context of adding all these reps again? Just want to make sure investors understand your thinking there?

Speaker 2

Well, we're not ready to give guidance for any of those elements for 2025, but I can give you some directional thoughts. On the revenue growth line, 57% to 69% growth rate. Our gross profit has been and will continue to be on the resell, 85%. And so the revenue exit rate, you can back into, I think. And then you can calculate the profitability into Q3 or before of 2025.

Speaker 2

I'd say it depends very fundamentally on maintaining a growth rate of greater than 50%, first

Speaker 8

of all.

Speaker 2

And so that means we'll accelerate in our guidance, in this case, not only are we having heavier revenue in the back half, we'll have a bigger organization. So of course, we should. And that growth rate is actually accelerating against the second half of last year. So that means that's the growth rate we go into in 2025. So I think the combination of growth rate, greater penetration into these new accounts with the larger sales footprint.

Speaker 2

Remember, it only takes 5 kits a month for a rep to breakeven in cost. So we've just learned about that again from our we had learned it in the when we had burns and we just learned it in the first two quarters of the full thickness launch. Just keep in mind that much bigger market, we've only been in 6 months. And by the time we expand the sales force a second time, we'll have only been in it 9 months. So 2025 reflects penetration into that very deep market of full thickness.

Speaker 2

Is that helpful?

Speaker 7

Yes, very helpful. And appreciate the color there. Maybe just to ask another question. As you given you're in the value analysis process right now with a lot of facilities with the manual resale system. And then behind that, you're going to introduce the Resell GO system.

Speaker 7

And its design is one where you're not collecting revenue for the system itself, but you have the consumable component. I'm just wondering how are you smoothing that process so that there are no kind of air pockets when you go in to try and switch out and maybe change the business model a little bit with Resell Go, appreciating the benefit that offers, but these are bureaucratic institutions that you're selling into. And I just want to make sure that there's no kind of impact as a result of that.

Speaker 2

Yes, it's a really good thought. The first principle of the Resell Go launch is to make it easy for our customers. And for them to understand that to get resell the res, what we call the CVAP, the spray on skin to get it, they will have to buy, resell, go cassettes. So since we're not billing them for or charging them for or making them make a cost commitment to the durable. We believe that we're going to make it very easy for them to adopt.

Speaker 7

Yes. Okay, fair enough. Appreciate that answer, Tim. Thank you.

Operator

Thank you. One moment for questions. Our next question comes from Chris Caioz with MSP Access. You may proceed.

Speaker 8

Thank you. Hi, Jim. Can you hear me okay?

Speaker 2

I can. Good morning, Chris.

Speaker 8

Good to see the result. Congratulations. I just wanted to pick up on adjacent products to the portfolio with Permian. And just you mentioned scaffolds and I imagine there are other adjacencies that you can look into. How does that impact your thinking around the sales force?

Speaker 8

And how are they going to balance different products coming online? That's my first part of the question. And the second part is, do you have any thoughts around taking those products into international markets?

Speaker 2

Yes. So multiple questions there. So with respect to the adjacent products, these are products that all fit the following definition. They are used on the same patients, by the same physicians, so and the same indications. So our rep is rather uniquely positioned because resell is a brand with a bit with frankly a bit of a halo.

Speaker 2

It doesn't have a direct competitor. The sales rep has good access to the hospital and to our customer base. So having other products that they that our customer might need is a real leverageable opportunity. So we think that this is additive in terms of value add to our customer and additive in fact to what we bring the hospital in terms of fewer vendors and additive to of course our results as a company. So the biosynthetic wound matrix of Permioderm fits so many more applications than ReCell.

Speaker 2

And often when we're selling ReCell or promoting it or discussing possible uses of it with a doctor, we might discuss several different patient indication patient indications and different patients before a resell is chosen to be used on a patient. But all of those patients will be candidates for Permuderm in this case. So it will give our reps an opportunity to have many reasons to fulfill the needs of the customer. Now to your last question, the PermianDIM relationship is currently and the contract is a domestic U. S.

Speaker 2

Agreement only. Notwithstanding, it's a very it's built as a real partnership in the way we're structured in this relationship. So we expect to be with Permiderm for a lot of years.

Speaker 8

Great. And that's very helpful. And in terms of going international with products like Permioderm, are you thinking that way at this point?

Speaker 2

We're not really thinking much that way at this point, primarily because we're really in the nascent stage of our international strategy. We're just so early that the priority is to establish resell first and we'll be doing that and that will take some time. So I don't it isn't a priority to strengthen that portfolio. In fact, what we're finding is the distributors that we're considering, including the one we did sign with in Europe, all have a broader portfolio already, which helps them sell more resells. So I think at the moment this is a domestic U.

Speaker 2

S. Strategy.

Speaker 8

Sounds logical. Thanks for that. Thank you.

Speaker 2

Thanks, Chris.

Operator

Thank you. One moment for questions. Our next question comes from Madeline Williams with Wilsons.

Speaker 9

In regards to going back to, I guess, the bottleneck with launching into the trauma centers. I mean, how much color do you get of what the process ongoing process is like? And whether you're going to be able to get that uplift in second half, just taking into account the guidance that you've given to the Q1 and then obviously full year guidance?

Speaker 2

Well, Madeline, I think it's a good question. I think we're largely through the consequence of the more complex value analysis committee process because we've started them and we continue to start more and they're coming out. The new accounts are coming out of the process and we started new ones. So it's slowed us a little bit in the Q4, but not much. And we but we do note that it is different and it is more complex.

Speaker 2

But what comes with that is a much bigger market with many more patient indications and many more possible treatment candidates. So I think right now we're probably after this call you won't hear much about VAC other than we're progressing really well and we're hitting our targets for the year. And I've mentioned that we expect to add nearly 200 new accounts for the year. So and we're on a good pace here in the Q1 to make that happen.

Speaker 9

Yes. Okay. That's great color. And just in regards to, I guess, then translating that access into sales. I mean, I know there's some crossover with the surgeons utilizing in both burns and then more trauma surgeons.

Speaker 9

But I mean, are they sort of already aware of being able to utilize resell? And is the discussion in terms of the difference between resell and resell go already happening?

Speaker 2

Well, the difference between resell and resell go, first of all, the output of the 2 of them is the same. But since we don't have FDA approval, we're not discussing resalego with customers at this moment. That we have to wait for approval for. I don't think that will be a big challenge for them. We've done private focus groups with them to talk about how we're going to introduce the product.

Speaker 2

It's going to be a I think the word is a wholesale conversion of our business model. So all customers will who want to use resell will do so with a resell go durable and use the resell set. So it will be a conversion that we execute during Q3.

Speaker 1

Okay. That's very helpful. Thanks.

Operator

Thank you. Our next question comes from Leanne Harrison with Bank of America. You may proceed.

Speaker 10

Yes. Good morning, Jim and David. If I could come back to the conversations you're having about ResellGo, I know you mentioned that it hasn't been launched yet. But if I think about rest of the world, how familiar is the rest of the world surgeon community familiar with resell currently as it is? And how should we think about the rate of adoption there?

Speaker 10

And then secondly, with the Polymedics training, did you also have them trained on ResellGo so that they're ready to go when the launch occurs in May?

Speaker 2

Got it. Okay. Let me make sure I line them all up. There is across Europe and Australia and Japan, I'd say good to moderate familiarity with resell already. That said, we were not commercial in anywhere but Japan during this time.

Speaker 2

So I think we're introducing resale into a market where most are going to be new. Now with respect to resell go and let's just take Europe for first. We are launching resell the it's called resell 1920, which is the standard system in Germany, Austria and Switzerland now. And when Resell GO gets its CE mark through the MDR, which we expect sometime in Q3, they will convert. So some distributors and some customers in Europe, depending on when we signed a distributor, may see resale for the first time in the resale go configuration and not have ever seen the original resell or not have used it.

Speaker 2

So, I think it will be a matter of timing on that level. And no, we didn't train Polymedix on resell Go. That will be something we'll do when the product is approved.

Speaker 10

Great. Thank you. And then if I think about gross margin, so obviously, well, for this quarter, you had a material improvement in gross margin. I guess that you talked about for 2024, you mentioned you guided to 85% gross margin. Is there any reasoning why you don't think you could maintain that higher watermark of 87% going into 2024, particularly given you are increasing your volumes over that period?

Speaker 2

Yes, it's a good question. So first of all, just to be precise, I didn't exactly give guidance of 85%. We've been operating in that territory, were my words. And I want and there's a reason I'm emphasizing that. Our margin with Permianderm will be 50%, not 85%.

Speaker 2

So our on resell, we will very likely be in that 85% range. And you may have captured during the call that we're making some investments in our manufacturing operation, rather substantial frankly. And that couple of margin points makes a little bit of it does make a little difference when you completely rehab the facility. So our cost structure has gone up a slight bit on the one hand. And on the other hand, we will be introducing into our mixed gross profit a 50% gross profit product.

Speaker 10

Okay, great. Thank you. And one last question for me is on operating costs. So in 2023, we saw 43% in operating costs, which pretty much is in pace with your revenue growth over that period. Should we expect that again for 2024 or do you expect some operating leverage, particularly towards the second half of twenty twenty four, given that you mentioned you might get acceleration of revenue

Speaker 2

there? I'm going to have David jump in on this one.

Speaker 3

Yes, we don't see that same sort of percentage in 2024. We are expanding our sales force. So from a sales expense standpoint, there will be an increase. But the R and D expense is not going to increase by 43% again, as well as G and A is not going to increase either. So there will be leverage as you indicated as our revenue accelerates at the towards the end of the year and the second or the 3rd Q4, you will see a decrease as a percentage in operating expenses when compared to revenue.

Speaker 10

All right. Thank you very much. That's all I had.

Operator

Thank you. I would now like to turn the call back over to Jim Corbett for any closing remarks.

Speaker 2

Well, thank you very much to all of you for joining our call today. We look forward to our next earnings call to announce our progress in Q1. Looking forward to hearing from all of you soon. Thank you.

Operator

Thank you for your participation. You may now disconnect.

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Earnings Conference Call
AVITA Medical Q4 2023
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