We came across a bullish thesis on AVITA Medical Inc (RCEL) on ValueInvestorsClub by FT42. In this article we will summarize the bulls' thesis on RCEL. AVITA Medical shares were trading at $9.88 when this thesis was published, vs. closing price of $9.11 on Aug 29.

Scientist in a lab working on a research project, focusing on biotechnology and healthcare advancements.

AVITA Medical is at the forefront of regenerative medicine, specializing in innovative devices and autologous cellular therapies aimed at skin restoration. The company is particularly distinguished by its RECELL System, a breakthrough technology designed to revolutionize the treatment of burns and, potentially, vitiligo. The RECELL System is unique because it utilizes a small tissue sample to produce a spray-on solution that accelerates healing. This contrasts sharply with traditional skin grafting methods, which require significantly larger tissue samples and multiple surgeries.

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The RECELL System has already demonstrated impressive results in the burns market. Since its approval by the FDA in September 2018, AVITA Medical has seen its annual revenue skyrocket from $5 million to $50 million by 2023. The company's strategic focus on increasing the adoption of the RECELL System in burn centers is paying off, with growth expected to continue at a robust rate of 50% year-over-year. Although AVITA Medical has yet to achieve profitability, it remains financially healthy, holding net cash of $47 million and aiming to break even by 2025.

The RECELL System offers substantial benefits over traditional methods. For instance, it drastically reduces the amount of donor skin required for grafting, with studies showing a 97.5% reduction for second-degree burns and a 32% reduction for third-degree burns when used alongside autografting. Additionally, the RECELL System minimizes the number of surgeries needed for wound closure, with reductions of up to 60% for patients with extensive burns. This efficiency translates into significant cost savings, potentially lowering treatment expenses by 26% compared to traditional methods.

AVITA Medical's foray into the vitiligo market represents a new and exciting growth avenue. Vitiligo, a condition causing loss of skin pigmentation, is currently treated using labor-intensive methods, including the MKTP procedure, which is complex and limited to a few U.S. locations. The RECELL System could offer a more accessible and quicker alternative, potentially transforming the standard of care for vitiligo patients. The addressable market in the U.S. for stable vitiligo patients is estimated at over $5 billion, with a serviceable market opportunity of around $750 million.

Looking ahead, AVITA Medical’s valuation appears promising. The company is expected to achieve break-even status by the third quarter of 2025, with EBIT projected to grow to $83 million by 2027. A valuation model applying a 20X EBIT multiple suggests a potential company valuation of $1.6 billion, based on projected revenues of $253 million. This estimate is conservative compared to the larger markets of burns and vitiligo, indicating room for further valuation growth.

However, there are risks to consider. The company’s RECELL System has not yet been in the market for a year, and any adverse events reported to the FDA could impact its adoption. Additionally, while AVITA Medical’s balance sheet is solid, it could face challenges if it does not reach profitability by 2025, potentially necessitating additional debt. The company is also working to secure insurance coverage for vitiligo treatment, with an anticipated coverage date of late 2025. Moreover, the expiration of key patents in April 2024 introduces the risk of potential competition, although AVITA Medical's first-mover advantage provides some protection. A significant catalyst for AVITA Medical’s stock is the approval of the RECELL Go system. This next-generation version automates the RECELL System’s processes, potentially enhancing market adoption and operational efficiency.

In summary, AVITA Medical’s innovative approach to skin restoration, combined with its strong growth trajectory and market potential, makes RCEL stock a compelling investment opportunity.

RCEL is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 8 hedge fund portfolios held RCEL at the end of the first quarter which was 10 in the previous quarter. While we acknowledge the potential of RCEL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as RCEL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.