AVITA Medical - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $18.4M (+30% y/y) but below prior Q4 guidance after several top accounts deferred year-end purchasing; management expects normal ordering to resume and sequential growth to continue in Q1 2025.
• Gross margin rebounded to 87.6% (vs. 83.7% in Q3; 87.3% y/y), while operating expenses fell to $26.1M from $30.2M in Q3, establishing a baseline for each quarter of 2025 (no headcount growth planned).
• Strategic catalysts achieved: FDA 510(k) for Cohealyx (Dec 19) and FDA approval of RECELL GO mini (Dec 23); Cohealyx full commercial launch slated for April 1, 2025, and GO mini rollout began in Q1 2025, underpinning FY25 revenue guidance of $100–$106M and a path to GAAP profitability in Q4 2025.
• Liquidity and covenants: Cash and marketable securities were $35.9M at 12/31/24; the OrbiMed credit agreement was amended to lower 12‑month trailing revenue covenants through Q1 2026 (warrants issued as consideration), reducing near-term covenant risk.

What Went Well and What Went Wrong

• What Went Well

  • Portfolio expansion and approvals: FDA 510(k) clearance for Cohealyx and FDA approval of RECELL GO mini broaden the acute wound care suite; CEO: “we have established our position in therapeutic acute wound care”.
  • Execution on costs and margins: Gross margin recovered to 87.6% and operating expenses declined $4.1M q/q; CFO set Q4 opex as the 2025 quarterly baseline with no planned headcount growth.
  • Cohealyx clinical momentum: Early human use mirrors preclinical findings; CEO called the first case outcome “a turning point… and a breakthrough in acute wound care,” with 7-day graft readiness and earlier discharge expectations.

• What Went Wrong

  • Q4 revenue shortfall vs. prior guidance: Actual $18.4M vs. $22.3–$24.3M outlook due to customers’ year-end cash preservation; management expects deferred purchases to roll into Q1.
  • International delay: CE mark for RECELL GO slipped; current expectation is mid-2025, making near-term ex-US contribution modest.
  • Financing concessions: To adjust covenants, AVITA issued 145,180 low‑exercise‑price warrants to OrbiMed affiliates—helpful flexibility but a modest source of dilution.

Transcript

Operator (participant)

Today, and thank you for standing by. Welcome to the AVITA Medical fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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. Please go ahead.

Jessica Ekeberg (Director of Investor Relations)

Thank you, Operator. Welcome to AVITA Medical's fourth quarter and full year 2024 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 and presentation are available on our website, www.avitamedical.com, under the Investor Relations section. Before we begin, I'd like to remind you that this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 for comprehensive descriptions of the risk factors. 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.

Jim Corbett (CEO)

Thank you, Jessica. Good afternoon to those in the U.S. and good morning to our Australian investors. Thank you for joining us today as we review a year of remarkable progress and complete transformation. Over the past year, we evolved from a single-product company into a multi-product leader in therapeutic acute wound care. This initiative began in 2023 as we launched our strategic growth plan and expanded our core business to treat trauma and surgical wounds under the full-thickness skin defects indication. To support these efforts, we began building a scalable infrastructure, setting the stage for our first portfolio expansion. In January 2024, we announced PermeaDerm, the first addition to our multi-product portfolio. By April 2024, we had launched it, marking a pivotal milestone in our transformation and aligning our portfolio with our mission.

This mission, shown on slide three, is a cornerstone of who we are and where we are headed. Let me explain its significance and how it is shaping our future success. Our mission is to position AVITA Medical as a leading therapeutic acute wound care company, delivering transformative solutions. Our technologies are designed to optimize wound healing, effectively accelerating the time to patient recovery. The words in this statement are meaningful. Let's break down what this means. Therapeutic means that our solutions are designed to actively heal and cure patients, not just be palliative forms of care. Acute defines the nature of our focus. We treat patients with event-driven injuries, burns, traumatic or surgical wounds, not chronic wounds such as diabetic foot ulcers, venous leg ulcers, or pressure sores. Simply put, our patients are victims of severe, unexpected accidents or events like car crashes, industrial fires, or traumatic burns.

Their common denominator is not their age, it's not their gender, nor is it their ethnicity, but rather the shared nature of their injuries. These injuries could be the result of a solo road incident, burns sustained from an industrial fire, or worse, multiple injuries from a tragic event like the recent terror attack in New Orleans. Despite their diverse scenarios, these patients all have injuries due to traumatic events. Our mission to help patients heal faster not only reduces overall healthcare costs, but more importantly, helps patients return home to their loved ones more quickly. This underscores the power of our technologies and the driving force behind our expanded product portfolio. Please turn to slide four to see the related markets that we serve as I explain how our product portfolio aligns with our mission.

Let's start with our core product, RECELL, and review how it optimizes patient healing and accelerates patient recovery. First and foremost, what makes RECELL special is that it is skin-sparing, allowing physicians to achieve closure using significantly less healthy donor skin, also known as autologous skin. Compared to traditional grafting techniques, RECELL expands the autologous sample 80 to 1. Additionally, substantial clinical evidence demonstrates that patients treated with RECELL heal faster, experience less scarring, and leave the hospital sooner. RECELL GO, our next-generation system, combines the proven outcomes of RECELL with enhanced features that simplify and streamline its use in both burn and trauma centers. The conversion to RECELL GO is going very well. We have converted nearly all of our burn accounts and over 70% of our trauma center accounts for approximately 83% of our total unit volume.

As a reminder, each of our standard RECELL GO processing kits can treat up to 1,920 square centimeters, which is roughly 10% of total body surface area. However, most traumatic wounds are under 480 square centimeters, or about 2.5% total body surface area. This size difference created somewhat of a cognitive dissonance for the clinicians using a standard RECELL kit to treat a small wound, like using a sledgehammer to drive in a small nail. To address RECELL GO mini for wounds under 480 square centimeters, filling a critical gap in our trauma care offering. As anticipated, we received approval for RECELL GO mini on December 23rd. We RECELL GO mini to burn and trauma centers that currently treat a significant volume of smaller wounds during Q1.

Incidentally, RECELL GO mini uses the same RECELL GO processing device as the standard RECELL GO processing kit. This innovation is the foundation of our portfolio, unlocking possibilities in therapeutic acute wound care with complementary solutions like Cohealyx and PermeaDerm. PermeaDerm, a temporary biosynthetic dressing, further strengthens our portfolio by supporting wound healing before and after grafting. It plays a role in helping clinicians heal patients faster, get patients home sooner, and reduce hospital stays, thereby lowering overall costs of care. I want to take a moment to remind you about the unique qualities of PermeaDerm. First, it is porous, facilitating airflow to the wound to promote healing while enabling exudate drainage. Next, its porosity is flexible, which lets the clinicians adjust moisture levels, ensuring optimal healing conditions for each patient's unique wound needs.

Finally, its transparent cover allows clinicians to monitor the skin graft, healing progress without disturbing it, rather than lifting or removing the dressing, which can potentially disrupt the graft. Practitioners have a clear view of the progress, making it uniquely effective. Taking our wound healing approach a step further, our newly FDA-cleared dermal matrix Cohealyx represents a breakthrough in addressing the critical need for accelerated graft readiness. Cohealyx is a collagen-derived dermal matrix that we co-developed with Regenity Biosciences. Our goal was clear: create a material that integrates into the wound bed and absorbs histologically, eliminating the need for removal before skin graft application and reducing the number of days to graft readiness.

In a validated porcine model, our preclinical work demonstrated that when Cohealyx is used as a dermal matrix on a large wound, it is ready for grafting in just seven days, compared to 12-21 days for alternative dermal matrices in the studies. This faster readiness translates directly to shorter hospital stays, reduced cost, and better patient outcomes. In full-thickness wounds, Cohealyx provides a 3D structure that supports tissue regrowth, the formation of new blood vessels, and is eventually absorbed into the wound. To illustrate the significant benefits of faster healing, it's important to understand the complexities and challenges associated with treating full-thickness wounds. By definition, a full-thickness skin injury penetrates all layers of the skin, causing significant soft tissue loss and damage to the connective tissue's structural integrity.

Unlike a superficial knee abrasion, where your own cells repopulate quickly and often heal overnight, full-thickness wounds lack the necessary healthy cells to rebuild the missing connective tissue. This leaves the wound open and at risk of severe infection and scarring, delayed timely surgical intervention. For example, the standard of care is a two-stage procedure. Let me describe it for you. If you were to clean the wound bed and immediately perform a split-thickness skin graft to close the wound, the graft may not take due to insufficient connective tissue. Without first preparing the wound bed using a dermal matrix, there could be a loss of functionality or, additionally, an unsightly outcome resulting from the deep tissue loss and likely heavy scarring. This is why full-thickness injuries require a structured, two-stage surgical approach to reconstruct the lost or damaged tissue.

In cases of severe tissue loss, such as a shark bite or necrotizing bacterial infection, treatment may also involve excision of damaged tissue, then the use of Cohealyx to build a dermal base, followed by split-thickness skin graft closure, and possibly an application of PermeaDerm to protect the healing environment. It is important for us to develop human clinical data to support the launch of Cohealyx. To accomplish this, we have initiated a post-market clinical study known as Cohealyx One, which is currently pending IRB approval at multiple sites across the U.S. This study uses an objective performance criteria study design known as OPC to benchmark Cohealyx performance against published data from alternative dermal matrices. We are measuring key outcomes over a 26-week period, including days to graft readiness, days to closure, and days to go home.

We anticipate that this study will demonstrate accelerated seven-day graft readiness and shorter overall time to wound closure compared to alternative dermal matrices, further reinforcing the value of Cohealyx. Early patients have already been completed ahead of the formal enrollment of Cohealyx One. In fact, our first case has already shown promising results consistent with our preclinical findings. Let's turn to slide number five to look at the highlights of this case. In mid-January, a 67-year-old woman sustained a third-degree burn while cooking over her stove, as shown in image A. She was treated at the Ohio State Wexner Medical Center, where she received an application of Cohealyx, as seen in image B. By day seven, as shown in image C, her wound was ready for grafting, consistent with our preclinical findings. Within a week and a half, she was discharged from the hospital.

According to one of her clinicians, had she been treated with an alternative dermal matrix, her hospital stay would likely have extended to a month. This case highlights why, as you can see on slide six, the medical community has already started to recognize Cohealyx as a game changer in the treatment of acute wounds. According to our treating physician, not only does Cohealyx reduce the amount of time a patient spends in the hospital, but he believes that it will allow physicians to treat more patients because of how easy it was to use in the operating room. Quite honestly, this outcome is a turning point for AVITA Medical and a breakthrough in acute wound care, setting a new standard for treating and healing severe injuries while lowering the cost of care and shortening the time for patients to return home.

PermeaDerm and Cohealyx fit strategically within our portfolio, as illustrated on slide seven. By playing integral roles in the two-stage standard of care for full-thickness wounds, consider a patient with a burn covering 10% of their total body surface area. First, the procedure begins with a surgical excision of the burn. Next, PermeaDerm could be applied to temporize the wound bed, allowing the wound to improve for a short period of time. After clinicians have determined that the wound bed is free from necrotic tissue and infection, Cohealyx is applied to prepare the wound bed for grafting. Approximately seven days later, which is 4-14 days faster than alternative dermal matrices, the wound graft is ready, meaning there is sufficient tissue regrowth to proceed to the second stage.

The second stage begins with a split-thickness meshed autograft combined with RECELL spray-on skin cells placed over the newly generated tissue. As a reminder, RECELL supports definitive closure, using significantly less healthy skin compared to traditional autografting procedures. Remember that RECELL expands the autologous sample 80 to 1. A layer of PermeaDerm is then applied over both the graft and the newly applied spray-on skin cells, and separately to the RECELL donor site to aid in the healing process of both wounds. This wound is continuously assessed to determine when the patient is ready to leave the hospital. This integrated approach improves clinical outcomes while significantly expanding AVITA Medical's market opportunity. Let's look at the total available market potential per patient. For a 10%-20% total body surface area wound, the average selling price for RECELL is $6,500-$13,000. PermeaDerm adds $2,000-$4,000 as a dressing.

When Cohealyx is applied to the same wound, it increases the potential average selling price between $20,000-$40,000. In the aggregate, when all three products are used together, the potential average selling price ranges between $28,500-$57,000, all the while providing substantial clinical and economic benefits by accelerating the time for the patient to return home. One last point: Cohealyx can also be used independently of RECELL, as demonstrated in the Wexner Medical Center case discussed earlier, resulting in an additional increase of the total addressable market for AVITA Medical. On April 1st, we will initiate the full commercial launch of Cohealyx for large wounds using a consignment model with RFID tracking to simplify hospital adoption and inventory management. Our sales reps will use the RFID reader to track inventory for the hospital, our internal accounting, and the FDA.

We plan to price Cohealyx below current market leaders, further positioning it as a value-driven solution. Competitive pricing, coupled with a consignment model and a reduced time to graft, are key benefits that we believe will help us progress through the value analysis committee process faster. With Cohealyx, we add nearly $1 billion to our total addressable market, or TAM, just within the 120-plus burn centers, on top of the approximate $500 million TAM for RECELL and the $100 million TAM for PermeaDerm in these same burn centers. In trauma centers targeting full-thickness wounds, Cohealyx adds $1.35 billion in TAM. PermeaDerm contributes $135 million in TAM, and RECELL provides a potential of $1.5 billion in TAM. In the aggregate, AVITA Medical now has a combined $3.5 billion TAM opportunity in the U.S. alone. Let's take a moment and look backwards.

Two years ago, our total TAM for RECELL was $500 million solely in burn centers. Just 18 months ago, we received FDA approval for the full-thickness indication, which dramatically expanded our TAM by allowing us to enter the trauma center market. In that time, we've gone from a $500 million TAM in burns to a $3.5 billion TAM in burns and trauma centers. Looking ahead, our strategy is clear. Number one, expand RECELL GO adoption. Number two, roll out RECELL GO mini during the first quarter, focused on trauma centers. This will expand our trauma center market by approximately 270,000 full-thickness acute wounds annually. To be clear, we will not be targeting chronic wounds or chronic wound centers. Number three, launch Cohealyx commercially. Number four, continue to roll out PermeaDerm.

Finally, number five, we expect the notified body in the European Union to grant the CE mark for RECELL GO by the middle of the year, opening up markets in Europe and Australia. We remain committed to generating free cash flow in the second half of the year and achieving GAAP profitability during Q4 of 2025. In summary, 2024 was a transformational year. Our expanded product portfolio, which now includes RECELL, RECELL GO , RECELL GO mini, PermeaDerm, and Cohealyx, has taken us from a $500 million TAM with a single product focused solely on burn centers to a $3.5 billion TAM in therapeutic acute wound care across both burns and trauma centers. I want to thank our team, customers, and shareholders for their unwavering support as we continue to revolutionize the standard of care in therapeutic acute wound treatment.

With that, I will turn the call over to David for a closer look at our financial results and guidance. David?

David O'Toole (CFO)

Thank you, Jim. For the three months ended December 31, 2024, our commercial revenue was $18.4 million, representing a 30% increase compared to the same period in 2023. This growth was driven primarily by the continued deployment and adoption of RECELL GO in our existing burn centers, as well as new accounts in trauma centers. As we look forward to 2025, we expect RECELL GO mini and Cohealyx to contribute substantially to our revenue growth following their launches in February and April, respectively, with PermeaDerm's revenue also gaining momentum throughout the year. As expected, our gross profit margin for the fourth quarter improved to 87.6%, recovering from the temporary decline last quarter and slightly increasing from 87.3% in the same period of 2023.

As I indicated during our third quarter conference call, Q3 operating expenses were elevated in that quarter due to one-time non-reoccurring expenses. In line with this previous statement, our Q4 operating expenses totaled $26.1 million, a $4.1 million decrease from the Q3 total of $30.2 million. We have no plans to increase our headcount or other operating expenses in 2025. As such, Q4 total operating expenses should be a consistent baseline for each quarter in 2025. Also note that the total operating expenses of $26.1 million in the fourth quarter include non-cash expenses of approximately $2.8 million of stock-based compensation expense and approximately $0.4 million of depreciation and amortization. Q4 2024 operating expenses increased by $1.4 million compared to the same period in 2023. This increase was primarily due to a $3.9 million rise in sales and marketing expenses stemming from employee-related costs within the expanded commercial sales organization.

P&A expenses decreased by $0.6 million due to lower salaries and benefits, as well as reduced professional fees. Similarly, R&D expenses declined by $1.9 million, reflecting lower outside professional fees due to the completion of the Vitiligo tone study. Other income expense shifted from $6.3 million in income in the same period in the prior year to an expense of $0.3 million in the current quarter. The $6.6 million decrease primarily resulted from a one-time non-cash gain of $9.4 million from the wind-down of our foreign subsidiaries, offset by the change in fair value of the warrant liability. For the fourth quarter, other income expense consisted of a non-cash charge of $0.7 million related to the change in fair value of the warrant liability, offset by $0.4 million in investment income. Briefly, I'd like to address the guidance announcement made on January 7th.

We have gained a better understanding of the year-end purchasing patterns among our key customers. At the end of Q4, several top accounts strategically chose not to finalize pending purchase orders due to year-end cash preservation strategies, leading to an approximately $3 million-$4 million revenue shortfall. Importantly, these deferred purchases were due to timing decisions, not a lack of demand or commercial operational issues on our part. During January, we experienced normal purchasing activities, which should result in renewed strong first-quarter revenue growth. Moving on to the full-year results, for the full year ended December 31, 2024, our commercial revenue increased 29% to $64 million compared to $49.8 million in 2023. It was disappointing to have the revenue miss in the fourth quarter.

As you can see from the slide, we do not want to lose sight of the fact that we have had significant year-over-year revenue growth for the last five years. The 29% growth in 2024 was driven by the RECELL GO transition, deeper penetration within existing accounts, and new account growth targeting trauma centers. The gross margin for the full year was 85.8%, meeting the higher end of our previously given guidance of 85-86%, and up 130 basis points from 84.5% in 2023. Total operating expenses were $111.8 million compared to $86.4 million in 2023. The increase is primarily attributable to $20.9 million in higher sales and marketing expenses, reflecting employee-related costs from our commercial team's expansion. P&A expenses rose by $4.9 million due to increased headcount, along with higher salaries and benefits and stock-based compensation.

R&D costs declined by $0.5 million, primarily due to reduced professional fees, partially offset by higher employee-related compensation costs within our medical science liaison team. Other income expense for the year decreased by $8.3 million, moving from $8.5 million in income in the prior year to an income of $0.2 million in 2024. This change primarily resulted from a one-time non-cash gain of $9.4 million in 2023 from the wind-down of certain of our foreign subsidiaries, offset by a change in the fair value of the warrant liability. Interest expense increased by $4.2 million year-over-year, attributable to the long-term debt of $40 million under the OrbiMed credit agreement.

Net loss for the fourth quarter was $11.6 million, or a loss of $0.44 per basic and diluted share, compared to a net loss of $7.1 million, or a loss of $0.28 per basic and diluted share in the same period in 2023. Net loss for the full year 2024 was $61.8 million, or a loss of $2.39 per share, compared to a net loss of $35.4 million, or a loss of $1.40 per share in the prior year. As of December 31, we had $35.9 million in cash and marketable securities. As reported last quarter, we utilized $9.7 million in cash during Q3. We continued this downward trend, further reducing our use of cash to $8.5 million in the fourth quarter.

This reduction was achieved despite an increase in accounts receivable, which rose by $4.1 million to a total of $11.8 million as of December 31, 2024, compared to $7.7 million as of December 31, 2023. Note that our day sales outstanding, or DSO, did not increase. As we move towards generating free cash flow in the second half of 2025, we anticipate that our use of cash will continue to decline over the next three quarters. In connection with our debt facility with OrbiMed, we executed an amendment today to lower the trailing 12-month revenue covenant for quarters ending March 31, 2025, through March 31, 2026. The 12-month trailing covenant of $115 million for quarters ending after March 31, 2026, remains unchanged.

Looking ahead for the full year 2025, we expect commercial revenue to be in the range of $100 million-$106 million, representing growth of 55%-65% compared to 2024. Additionally, we expect to generate free cash flow in the second half of this year and achieve GAAP profitability during Q4 of 2025. As previously stated, we do not foresee any further expansion of our commercial organization over the next 18-24 months. This revenue guidance and financial projections are consistent with our announcement made on January 7th. We remain confident in the success of RECELL GO , the April 1st full commercial launch of Cohealyx, and the rollout of RECELL GO mini, combined with the growing adoption of PermeaDerm. These strategic efforts position us to deliver strong results this year and drive significant shareholder value. With that, I will turn the call back to the operator for your questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Phil Soran (Board of Director)

Hey, this is Phil on for Matt. Thanks for taking our questions. For starters, I guess just on the cadence of the guidance, would you expect similar sequential growth each quarter, or might it be a little bit more back half-weighted given the contributions from Cohealyx and maybe some timing of VATC?

Jim Corbett (CEO)

Yeah. Now we have a little bit more complex multi-product rollouts, so it will create some complexity in answering your questions. Let me try and do it simply. Consecutively from Q4, you should expect we will be up notably in Q1.

By that time, we'll be in full launch with RECELL GO mini, and PermeaDerm is now additionally gaining a lot of momentum. Q2 should then also be up sequentially. Yes, you're right that Cohealyx has such big revenue impact in the back half, it could have a very significant effect. I see us having a consecutive quarter cadence increasing over prior quarter with, so to speak, we have plenty of gunpowder here and a lot to execute, but plenty to keep our revenue line driving. I would expect that cadence to be rather strong during the year.

Phil Soran (Board of Director)

That's helpful. I guess just sticking with guidance and trying to dive down a little deeper as for what's assumed in the growth of the three product categories. I think in your prepared remarks, the guidance assumed somewhat significant contribution from Cohealyx.

I was hoping if you could provide a little bit more color on what that might entail as far as market share gains pretty quickly in the second half of 2025, maybe attachment rates to Cohealyx on current RECELL procedures, that sort of thing, just to get us a little bit more comfortable with that second half.

Jim Corbett (CEO)

Yeah. We're not going to break out, I think, by product at this point today, but I'll give you a way to think about it. That when I gave you the breakout of what the TAM is per case, we do, if you recall, the RECELL contribution, the PermeaDerm contribution, the potential Cohealyx contribution. If you just looked at burns, for example, we treat about 1,000 burn cases a month in the last quarter or two, right, at about that rate. It's growing.

Those averaged in excess of 10% total body surface area. If you try to figure out how, it's kind of an equation we don't know the answer to, which is how quickly we get through VATC, but as soon as you do, the revenue upside is considerable. We'll get some experience about that. We've taken a very careful approach with a limited market release here in Q1 where we're doing cases that, where what we're doing is gathering clinical data because it's post-approval. We are in the process of enrolling Cohealyx One, which by virtue of the very significant difference we're proving, right, seven days to graft versus, in some cases, 20. You don't need a big number of patients to prove that statistically. In fact, it's approximately 40 patients to achieve full enrollment.

That will give us a lot of support by the end of the first half.

Phil Soran (Board of Director)

Thank you. You might think about that.

Thanks so much.

Operator (participant)

Thank you. Our next question comes from Ross Osborn of Cantor Fitzgerald. Your line is open.

Matthew Park (Equity Research Associate)

Hey, guys. This is Matthew Park on for Ross today. Thanks for taking the questions. I guess starting with mini. Hi, how's it going? As you continue to roll out mini, are there any trends in adoption or feedback that stand out that kind of give you confidence once you go into this full commercial launch?

Jim Corbett (CEO)

Actually, what's good about mini is it's used in the same RPD, the same processing device. The cassette design is exactly the same from a manufacturing point of view. The three wells that you put skin and buffer and enzyme in are just smaller.

It is very easy to use. This concept where a doctor would feel like, "Wow, I'm using a 10% total body surface area treatment to treat a less than 2.5% total body surface area problem," that seems wasteful. That is how they felt when we did the market research on it. Actually, the vast majority of those 270,000 surgical and trauma wounds are under that 480 sq cm, that 2.5%. We are quite optimistic. It has been just less than a month, so it is a little bit early for trends. We, of course, do not have a—they have already got the RECELL processing device, so it is a rather easy additional choice for them. We are quite optimistic about it.

Matthew Park (Equity Research Associate)

Got it. That makes sense. Just one more from me.

Do you mind reminding us again what your high gross margin in the quarter and I guess how we should think about the general cadence of gross margin in 2025?

David O'Toole (CFO)

Yeah. This is David. Thanks for the question. As far as the gross margin for the quarter, it was over 87%. We believe that our gross margin for RECELL products will stay in that range, 85%-87%. Overall gross margin is going to go down because of the distribution arrangements we have for Cohealyx and PermeaDerm, which we share gross margin on that, basically 50/50. As those products become more significant in our portfolio and our revenue mix, our gross margin overall is going to go down. As I've said, and as you probably know, that profit margin all drops to the bottom line because there's no additional cost to generate that revenue.

Our overall gross margin may have a small decrease, but we're still going to be in a better position from an operating profit margin basis.

Matthew Park (Equity Research Associate)

Got it. That makes sense. Thanks for taking the questions, guys.

Thank you. Our next question comes from Ryan Simmerman of BTIG. Your line is open.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Good afternoon. Can you hear me okay?

Jim Corbett (CEO)

Hear you well, Ryan. How are you doing?

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Good. Good. Thanks for taking the question. A couple of questions for me, guys. First, Jim, I appreciate you're not breaking out guidance by product. How much international sales is contemplated in the guidance, and when do you expect potentially clearance in Europe?

Jim Corbett (CEO)

Yeah. It's a great question. It's modest, Ryan. The reason it's modest is we've been through the substantive review with the notified body. As a fact, they are let me see exactly.

They had committed to U.S. approval in October. We are now in February, and we do not have it yet. We do not have any technical challenges, but we have an unpredictable process. That is representative of our mid-year expectation. There are no more submission materials to be reviewed or submitted at this time. It is modest.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay. The inventory that was in the channel in the fourth quarter, Jim, a couple of questions on that. One, how much of that was RECELL? How much of that was PermeaDerm? Was all that worked down in the fourth quarter?

Because, David, to your comments that you expect the sales to pick up in the first quarter, is there, I guess, I'm just wondering why there isn't inventory to be worked down in the first quarter necessarily from what was in the channel kind of late in December.

Jim Corbett (CEO)

Yeah. A couple of comments. The majority of inventory for us, RECELL, I mean, PermeaDerm is still a small part of our inventory. I mean, or excuse me, our sales fundamentally. We have inventory on the balance sheet. What's different in PermeaDerm is the really rather large increase in evaluation. We're getting the traction. It took us a little while to basically develop the clinical support materials that are necessary because it was not on the market really before, even though it had been test launched, I guess, by Milliken before.

With respect to your question, keep in mind all of our customers have inventory on the shelf because of the nature of our business, right? We're a therapeutic acute wound business, right? When the patient shows up, they have to have it. We're not having any signs that would suggest that there's inventory to work off to make our revenue successful in Q1. I don't think that's going to be a that's not showing as a challenge to us at the moment.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay. Last one for me. I just wanted to sneak one in. No, that's helpful, Jim. I mean, the last one for me, David, there was a little lease revenue this quarter. I'm just wondering if you expect that to be a bigger trend in the placement of systems over time as you think about your guidance, the 103. Yeah.

David O'Toole (CFO)

The lease revenue is just a portion of the overall resale sale of the RPKs and RPD or RPKs. We, as you may remember, provided our hospitals and facilities with the RPD, the processing unit, at no cost. For accounting purposes, and this is only for accounting, we have to allocate a portion of the revenue from the sale of the RPKs, the actual disposable kits, between revenue and lease revenue. That is what that is. It really is not lease revenue. It is an accounting treatment that is required by us.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Okay. That is very clear. Yeah. Yeah.

Jim Corbett (CEO)

It might even be very helpful to really, it is almost worth thinking about it as the amortization methodology for the cost of the RPD.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

That is what I was trying to understand because I just was wondering if potentially the model is changing in terms of how you are placing systems necessarily.

That's what I was trying to understand.

Jim Corbett (CEO)

Yeah. Yeah. Okay. Yeah. Yeah. We're not. Yeah.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from Brooks O'Neil of Lake Street Capital Markets. Your line is open.

Brooks O'Neil (Senior Research Analyst)

Thank you. Good evening. I have not had a chance to read the 8-K related to the OrbiMed renegotiated credit agreement, but in the prior one, there was some question about the quarterly covenant that I considered a giant deal to have to begin repaying that debt. Can you just give us a sense for how much of a cushion you've gotten in, for example, Q1, Q2, and Q3 as you look toward the end of this year?

Jim Corbett (CEO)

Yeah. Brooks, thanks for the question. All of the details are in the 8-K, but I'll give you the details for these first two quarters. The revenue is on a trailing 12 months.

For the first quarter, it is now $73 million, down from $75 million for the last 12 months. For Q2, it's now $78 million, down from $90 million. There was a significant decrease. It does not give any indication that that's what we think our revenue is going to be. It just gives, as you said, a little bit of cushion so that we do not have to repay the debt.

Brooks O'Neil (Senior Research Analyst)

Right. I am guessing, but again, I have not read it, that the terms are substantially the same, or has there been a big change in terms of what happens if you happen to break the covenants under the new agreement?

Jim Corbett (CEO)

The terms remain the same.

Brooks O'Neil (Senior Research Analyst)

Terms the same. Great. Okay.

The second thing I was curious about is it's my sense that with Cohealyx, you got the initial approval based not so much on human clinical evidence, but animal work. I'm curious, Jim mentioned what sounded like tremendous success at, I think, Ohio State, but can you just give us some color on whether you're beginning to amass sufficient clinical evidence with humans to support the notion that Cohealyx can be a material contributor to your revenues in the back part of 2025?

David O'Toole (CFO)

Yeah. Brooks, I can. We received approval for that dermal matrix consistent with the market in terms of how you get what the FDA requirements are. They're pretty clear. The work we did in the validated porcine model, that's quite a scientific project. We did it 18 times. We looked at a lot of different materials.

We were looking for very precise qualities of histological absorption, yet providing the matrix structure for ingrowth of blood vessels, and yet have it go away so they do not have to remove it. All those kinds of factors. It has a lot to do with how you sterilize it and how you process the denatured collagen. When we applied our preclinical data, we have probably showed it to at least 50 physicians at this point. We have not met one yet who did not want to try it. Okay? That is kind of a piece of information, right? We have done a number of cases because, of course, it is approved that are not in the study. So far, all of them have remarked how well it handles intra procedure, and it is producing the clinical outcome in the short run.

Not all of them have reached the seven days because we only have done this recently or ready to graft, but none have taken longer at this point. We really feel good about and those are on humans. We plan on having 20 sites to enroll those 40 patients. We expect that we'll be able to do a couple of things that are by design. Let me share them with you. On one hand, it's a study with an IRB, and it's under controlled follow-up. On another, it's a post-market study. In the agreement, during the course of the study, let's imagine that a site has five patients enrolled. That physician can share that data with us or on the podium or in an abstract during the period of the study.

We do not have to wait until the study fully enrolls and becomes published in its aggregate sometime late in the year. Rather, we will be able to use that data as it is developed. That was very intentional as part of the study design. In any event, I think we are going to have the data by April 1 that supports a strong launch at that time.

Brooks O'Neil (Senior Research Analyst)

Great. I guess I will just finish by saying I am amazed at how much you guys have accomplished. Congratulations and keep it up.

David O'Toole (CFO)

Thanks, Brooks.

Brooks O'Neil (Senior Research Analyst)

Thank you, sir.

Operator (participant)

Thank you. Our next question comes from Joshua Jennings of TD Cowen. Your line is open.

Joshua Jennings (Managing Director)

Hi. Good afternoon. Thanks for taking the questions. I echo Brooks' comments on congratulations on all the progress. I am hoping to follow up on Brooks' question as well, just on adoption pace of Cohealyx.

I think in Cohealyx, as you're going to be running a cost-effectiveness study within, and I think cost-effectiveness for RECELL in burns was a big driver of adoption utilization. You cited the first case at Ohio State that the patient was discharged within 10 days when surgeon's expectations for the severity of her wound would have been closer to 30. I mean, how big of a driver do you guys anticipate that length of stay reduction and cost-effectiveness to be over time for Cohealyx adoption and utilization?

Jim Corbett (CEO)

Josh, we think it's going to be a very large deal, and it very well fits with the RECELL theme. As you know, there's a lot of data out there that demonstrates that patients treated with RECELL exit the hospital 30% sooner. And Cohealyx fits that theme.

When we work to get cost justification for RECELL, that is a very important matter for hospitals these days, and it should be. It is a very important matter for the treating physicians and the patients they treat. This seven days, we think, is going to be very determinant and giving us some leverage in terms of adoption. By the way, the study contemplates inclusion with Cohealyx alone or Cohealyx with RECELL, so it will have both and enroll. It is really looking at standard of care.

Joshua Jennings (Managing Director)

Great. Just thinking about the Cohealyx one, 40 patients enrolled and just the VATC process, I mean, is that enough? I am assuming your expectation is that Cohealyx one will be enough for most VATCs to get over the hump and give a positive decision. How do you see that playing out? Thanks for taking the questions.

Jim Corbett (CEO)

Josh, I think in the near term, what will be important will be the following. They will want to see the preclinical data in the VAC because it's in publication now. They'll want to see the case studies that we have done in real time. Third, they will want to have us be at a price point that saves them money. Four, they will want to not have to buy the inventory, and they will appreciate the consignment RFID system that we're going to market with. I think all of those will contribute to a faster VAC time.

Joshua Jennings (Managing Director)

Excellent. Thanks, Jim.

Operator (participant)

Thank you. That concludes our question and answer session. At this time, I would like to turn it back to Jim Corbett for closing remarks.

Jim Corbett (CEO)

Thank you, Operator. And thanks to all of you for calling in and listening.

We are really excited about the transformation of our company, AVITA Medical, into a therapeutic acute wound care company. We have a lot of excitement for the year ahead. I'm looking forward to sharing it with you. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating, and you may now disconnect.