AVITA Medical, Inc. (RCEL) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to AVITA Medical’s Third Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host, Caroline Corner, Managing Director at Westwicke. Please go ahead.

Welcome to AVITA Medical's fiscal third quarter 2021 earnings call. Joining me on today's call are Mike Perry, President and Chief Executive Officer; and Michael Holder, Chief Financial Officer. This call will include forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements including statements regarding the markets in which AVITA operates, trends and expectations for AVITA's products and technology, trends and demands for AVITA's products, AVITA's expected financial performance, expenses and position in the market, and the impact of COVID-19 on AVITA's operations and AVITA's customer's operations. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by the forward-looking statements. Please review AVITA's most recent filings with the SEC, particularly the risk factors described in AVITA's S-3 and 10-K filing, and in AVITA's quarterly report on Form 10-Q for the third quarter ended March 31, 2021 for additional information. Any forward-looking statements provided during this call, including projections for future performance are based on management's expectations as of today. AVITA undertakes no obligation to update these statements except those required by applicable law. AVITA's press release for the third quarter 2021 results is available on AVITA's website, www.avitamedical.com under the Investors section and includes additional details about AVITA's financial results. AVITA's website also has the latest SEC filings, which you are encouraged to review. A recording of today's call will be available on AVITA's website by 5:00 p.m. Pacific Time today. Now, I'd like to turn the call over to Mike for his comments on third quarter 2021 business highlights.

Thank you, Caroline, and thank you everyone for joining us today. The third fiscal quarter ended March 2021 was a solid quarter of execution here at AVITA with progress across several of our growth drivers. Before I delve into our recent performance, I realize that some of you listening today may be fairly new to AVITA Medical. So I'll commence with a quick backgrounder prior to moving forward with our recent progress. AVITA is a commercial-stage regenerative medicine company with proprietary technology platform known as the RECELL System, which is commonly portrayed as Spray-On Skin Cells. Clinicians take a small sample of the patient's skin. And within 25 to 30 minutes at the point of care can use the RECELL System to prepare a cellular suspension, which has then sprayed onto the wound to regenerate natural, healthy epidermis or skin, including the return of natural pigmentation. Before RECELL received pre-market approval or PMA in late 2018, allowing us to begin our commercial efforts in 2019, burn patients received large skin grafts from other parts of their bodies, which created sizable secondary wounds that were extraordinarily painful and provided new sites for potential infection and scarring. Today, the RECELL System delivers compelling well-defined clinical benefits by significantly reducing the amount of donor skin required to treat second and third degree burns and providing a win-win dynamic to physicians, patients, hospitals, and payers. While we are increasingly confident that RECELL is rapidly becoming the standard of care and what we estimate as a $260 million serviceable burn market, the RECELL System is not limited to applications in burns. As we previously disclosed, we currently have three pivotal clinical trials in progress in the United States that seek to leverage our PMA approval through a variety of label expansion opportunities. These indications involve prospective application of our RECELL technology to patients who have lost their epidermis through injury or accident, or for those patients who have impaired epidermis due to skin defects or abnormalities. We remain as specially energized about our opportunity in treating stable vitiligo, a common yet remarkably undertreated skin disorder. Beyond our near-term clinical pipeline prospects, we're exploring applications for the use of RECELL within the cell and gene therapy arena to attend to a significant number of life-threatening or debilitating skin disorders. So with that background on the company, I will now turn to some highlights from our recent quarter. While our revenues in the third fiscal quarter were like many of our peers hampered by COVID-19, we have continued to demonstrate progress with both our legacy burns business and our pipeline initiatives. Our burns revenues were $4.7 million, down 9% compared to the previous quarter and to December 2020, primarily due to a soft January, which was our lowest month of sales since the initial COVID shutdown last April. As a reminder, the slow January was due to a combination of factors, including a lower accident incidents during COVID as well as inventory stocking in Decembers as customers bought up to achieve their annual rebate tiers. We did experience some improved performance in the latter part of the quarter, overall 492 RECELL procedures were performed during the quarter, which was a slight increase over our second fiscal quarter. Over the past 18 months, we've made concerted efforts to target small burns in order to deepen our penetration in established accounts, burns covering less than 30% total body surface area, or TBSA represent approximately 95% of burn admissions. We have been successful in moving the needle and close to 80% of our cases now come from these smaller wounds. I should note that with this increased penetration, we also see the average number of RECELL units per procedure decreased. Consequently, while this decreases our average revenue per procedure, it correspondingly allows us to access many more procedures, which is consistent with our plan. In the third quarter, we opened six new hospital accounts, bringing the total number of burn centers with access to the RECELL System to 99. With the ABA estimating, there are 136 burn centers in the United States. We are very pleased with our commercial team success and we feel that we've established a solid footprint in this market and our focus will now be on driving utilization. As such, we don't anticipate regularly updating on this metric looking ahead. We have also seen an increased number of new surgeons using our product. For example, in this past quarter, we saw 147 unique surgeons using the RECELL System, which represents approximately 50% of the 300 U.S. burn surgeons. We view this as a healthy leading indicator for future growth as we drive penetration into our existing account base. Today, we're able to gain access to most accounts to support cases and aftercare as well as to perform training. Sales calls are still challenging. However, we are seeing traction in small offsite AVITA events. Furthermore on the heels of a successful series of 18 presentations at the 2021 American Burns Association meeting where our Founder, Fiona Wood was honored with the Everett Idris Evans Memorial Lecture Award, RECELL continued to be front and center at the John A. Boswick Memorial Burn and Wound Care Symposium and at the North American Burn Society meeting. We observed an important shift in the presentations and discussions at these conferences toward more advanced topics of practice integration and the use of RECELL with synergistic products, which demonstrates strong adoption and the community's commitment to ongoing post-market investigator-initiated research with RECELL. As we look ahead, our sales force will be focusing primarily on driving and expanding usage and adding new surgeon users within our existing accounts. As we mentioned on our last call, we were working through stocking inventory at the beginning of the third quarter, but we saw purchasing resume in February and March. Here in May, we are still seeing impacts due to reduced access and capacity limitations, but we were also seeing signs of improvement. Moving now to our progress in our pipeline vitiligo efforts. We continue to see a high level of interest in our vitiligo study and have increased the number of sites from seven to 11 during the quarter. For those unfamiliar with the condition, vitiligo is a skin order characterized by deep pigmented areas of skin that appear as white patches and are primarily attributed to an underlying autoimmune disorder in the patient. Vitiligo presents a sizeable market opportunity for us. There are an estimated 100 million suffers of vitiligo worldwide, including approximately 4.5 million Americans. Of those in the U.S., we estimate approximately 1.3 million have stable vitiligo meaning that their underlying autoimmune disease is being well-managed and their deep pigmentation is not continuing to spread. The stable vitiligo market in the U.S. currently represents approximately a $5 billion market opportunity. And there is no FDA approved product presently available to enable repigmentation for these patients. Patients whose vitiligo is stable and unresponsive to frontline therapies, such as topical treatments and phototherapy are candidates for RECELL. Our clinical trial sites require support in tapping into this population. Given that these particular patients have not benefited from conventional treatment, they are no longer routinely seen in the clinical setting. To address this situation, we launched a substantial multimedia recruitment campaign, including outreach on local radio, digital radio and social media. Rather than spending on media outreach during our third fiscal quarter at a time when vaccinations were still ramping up and many restrictions remained in place, we initiated these recruitment campaigns in April and expect to see subsequent increases in enrollment. We have already seen an uptick in referrals and we've identified potential study participants who are approaching the required 12 months of disease stability and plan to enroll in the coming months. In the third fiscal quarter, we enrolled three additional patients in our pivotal study, assessing the use of the RECELL System to treat stable vitiligo. Since the beginning of March, we have enrolled another three patients bringing our total to 16, and we expect enrollment completion in this trial by the end of 2021. Early feasibility data, points to the potential for us to consider dropping an arm of the pivotal study, thereby reducing the total number of subjects required. Assuming usual FDA review timelines, we continue to believe we should be in a position to enter the U.S. market commercially with this indication as early as the second half of calendar, 2023. You may recall that we have two other pivotal trials ongoing, both with the goal of expanding our PMA label into new indications. The pediatric partial thickness burns study funded by our BARDA contract aims to expand our burn indication to include the pediatric patient population. Enrollment in this study increased from 10 to 16 during the third quarter. As a potential alternative to completion of this prospective trial, we are engaged in dialogue with the FDA regarding prospective analyses of clinical data collected during the RECELL compassionate use and continued access programs to potentially support an expansion of RECELLs indication for use to include pediatrics. Please stay tuned for more communication on this front. In our soft tissue reconstruction trial for trauma, which involves non-burn wounds, such as necrotizing soft tissue infections and degloving injuries, we saw an increase in enrollment from 6 subjects to 22. Our site engagements efforts are paying off and it has been gratifying to see the increased momentum. 14 sites are currently enrolling in this trial. We plan to complete recruitment for our soft tissue injury trial in calendar year 2022 with a six month follow-up for the patients in this trial we're aiming for an approval in calendar 2024. Work also continues to progress in our collaborations with the University of Colorado, Gates Center for Regenerative Medicine for epidermolysis bullosa or EB, and with the Houston Methodist Research Institute for rejuvenation using RNA telomerase. These programs both aim to show preliminary proof-of-concept during this calendar year. I'd now like to walk you through the growth drivers we see ahead. To begin, we will continue to drive forward on physician engagement and education. With approximately 50% of U.S. burn surgeons using RECELL in the quarter and 81% of the approximately 300 U.S. burn surgeons trained to use our system. We have built a world-class burn physician base. We are further leveraging our training capabilities and physician engagement programs and adding new outreach efforts. For example, we are rolling out a virtual reality program to more adequately engaged surgeons remotely. We're seeing an increase in off-site programs, such as dinners and trainings and we look forward to launching our virtual reality offering very soon. As a March with restrictions relaxing a bit, we’ve been able to achieve access into all cases and for all aftercare support, however sales calls remain the challenging part, and we will update you as access here improves. Our commercial team will be continuing to drive penetration into our burn center accounts. As I mentioned, we are back approved and what we believe is a critical mass of burn centers. And with that, we are shifting focus to concentrate on penetration within these accounts. We anticipate that our strategy of driving into smaller burns will result in a broader recell usage and ultimately in a substantial increase in the volume of cases utilizing the recell System. Our pipeline efforts are moving forward and despite a less speedy rebound from COVID than we'd like, all three of our registration clinical trials continue to make gains toward completion. There are potential favorable changes coming with respect to the use of existing data for pediatric burn labeling and a reduction in the number of pivotal vitiligo subjects needed to pursue the vitiligo indication. We continue to be optimistic about our preclinical pipeline work in epidermolysis bullosa and rejuvenation. Turning to reimbursement, as you've heard previously, the company is seeking a transitional pass-through payment application known as a TPT, which will support a separate additional Medicare payment or C code for the recell System, specifically for its use in the outpatient setting. We had communicated previously that we had hoped that the centers for Medicare and Medicaid services or CMS would have made its final decision in December of last year with a C code to be implemented with effect on January 1 of 2021, however, CMS is experiencing delays due to COVID 19. If and when we receive a C code, our team is poised to initiate and leverage a pilot launch and to approach commercial payers to seek coverage for those in the outpatient setting. Based on the new timeline, we expect initial outpatient sales to commence by early 2022. Moving to our last growth driver we anticipate broadening, our geographic footprint over the coming years. To that end together with our commercial partner, COSMOTEC, we continue to seek approval in Japan. Our efforts and interactions with COSMOTEC and the Japanese regulatory health authority are actively ongoing. While we continue to prioritize the U.S. market, in parallel, we are frequently re-evaluating our re-entry into x-U.S. markets as we add new clinical indications for the recell system. In summary, looking ahead, we genuinely believe in the broad utility of the recell platform across multiple indications and despite the challenging macro environment, we remain encouraged by our sales forces demonstrated ability to build our burn center account base and thereby, teeing us up for future procedural growth. I'd now like to turn the call over to our CFO, Michael Holder for details on our financial performance in the quarter. Michael?

Thank you, Mike. Revenue in the third quarter ended March 31, 2021 was $8.8 million compared to $3.9 million in the corresponding period ended March 31, 2020, and compared to $5.1 million in the prior quarter ended December 31, 2020. In the third quarter ended March, 2021, recell commercial revenues were $4.6 million, while RECELL revenues associated with biomedical advanced research and development authority, BARDA were $4.1 million and attributable to the first delivery of RECELL units for emergency response preparedness. RECELL commercial revenues in the third quarter ended March 31, 2021 compared to the corresponding period ended March 31, 2020 increased $0.8 million or 21%. Gross margin was 76% for the third quarter of 2021 compared with 84% in the corresponding quarter last year. Lower third quarter gross margins resulted from a lower RECELL price point for units that were delivered or emergency preparedness associated with BARDA. Operating expenses were $13.2 million in the third quarter of 2021, compared with $19.7 million in the same quarter last year. The decrease in quarter-over-quarter operating expenses is primarily attributable to lower stock-based compensation, along with lower sales and marketing expenses, partially offset by higher costs in research and development. Lower stock-based compensation in the third quarter this year was driven by higher share-based compensation expenses in the same quarter in the prior year, associated with certain performance milestones being met. The decrease in sales and marketing expense in the current quarter is primarily due to reduced travel to burn centers and industry conferences necessitated by COVID-19 related travel restrictions, which was partially offset by higher prior year cost incurred with the RECELL product launch. Higher research and development expenses have resulted from a ramping up of clinical trial related activities for treatment of vitiligo, as well as other research and development costs incurred to further expand the company's pipeline. Net loss was $6 million for the third quarter of 2021 and net loss per share was $0.26 on a weighted average basic and diluted share count of 22.7 million, compared to $15 million and a net loss per share of $0.71 on a weighted average basic and diluted share count of 21.2 million in the same period of the prior year. Cash was $115 million as of March 31, 2021, which includes $64 million net proceeds from our capital issuance closed in the fiscal third quarter of 2021. Moving on to guidance for our fourth fiscal quarter, we expect total revenue in the fourth fiscal quarter to be in the range of $8.2 million to $8.6 million consisting of $5 million to $5.3 million of commercial RECELL revenue, and $3.2 million to $3.3 million of RECELL revenue associated with BARDA. With that, we thank you for your attention. And now, I will turn the call back over to the operator.

Thank you. [Operator Instructions] Our first question comes from the line of Josh Jennings with Cowen. Your line is now open. Josh Jennings, if your line is on mute, please unmute your line. Thank you. Our next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is now open

Afternoon, thanks for taking the questions. Just for starters, Mike, can you talk a little bit about what you saw from a productivity perspective from the salesforce toward the end of the quarter and then smaller burns are really kind of feed into growing kind of the core business?

Sure, Matt; my pleasure. Yes, what we're seeing was definitely a marked reduction in January. And then in February and March, we really saw a substantial recovery bringing us in at $4.6 million, $4.7 million for the quarter. And those smaller burns and I'll actually turn it over to Erin Liberto our Chief Commercial Officer to provide a little bit more color. But our target there is burns that are less than or equal to 30% total body surface area or TBSA. And we're – that comprises 95% of burn admissions overall, as I mentioned in my prepared remarks. And we're really very pleased with how we're trending toward getting a lot more patients that are being treated with the smaller burns, because that's where the volume is. Of course, there is going to be less revenue per procedure, but then we're really getting into the volume of procedures we’re trying to boost our revenues substantially. I'll turn it over to Erin to give a little bit more color on the latter part of the quarter and if she wishes on the smaller burns as well.

Sure. So hi Matthew, the March things were certainly starting to pick up. And so, when I look at the analysis in terms of how many case supports or training were done remotely, there was only I think, two done in March and those were not done due to COVID-related concerns. They were done simply due to resources and travel, right? So we are now able to get into these hospitals. We've got four for – that we're also using that are quite busy and we're seeing some positive tailwinds. We've got a couple of centers that have been completely closed down to us for about a year since COVID hit and they've recently allowed us to enter the hospital. So our field team is out there, they're in the hospitals, they're at – we had two live events as well, the NABS, Congress, as well as Boswick. And then we're seeing an uptick as far as offsite kind of local AVITA events. So they're incredibly busy right now, and we're seeing that as well trend and even further increase into April.

Thanks. And then just two more for me, if I may, I'm sorry, go ahead – Mike.

No, I just wanted to see if that answered your question.

That was actually spot on. So I appreciate it. So I guess the guidance for Q4 here, again on a core business, if I think about kind of the progression through the quarter, and obviously I don't have all the numbers. But the progression during Q3, it seemed like, you're probably doing something like $2 million or so in March. So the guidance for kind of – I think you said $5 million to $6 million and the core business is actually a little bit below that trend line, I don't know if there is some inventory that's working around or what's going on? But I'm just curious if it's really just more a function of, hey, we haven't been able to get into these accounts and really push, as we get into the next fiscal year, you should be – you should see a marked increase or improvement in the core business kind of versus the trend line.

I think you've nailed it. I'm going to pass it over to Erin. But, you're absolutely right. I think we're seeing still some restrictions due to COVID and our guidance on RECELL, specifically sales is being in the $5 million to $5.3 million for the next quarter. And BARDA being $3.2 million to $3.3 million is consistent with some of those restrictions starting to ease up and then really easing up in the next quarter following that. Erin?

Yes. And I think it's a fair point, right? So we had – fortunately it was only 99 accounts we can certainly kind of forecast each one individually as well. And we know that each account has their own circumstances, and so, that was a factor as well. I think the big thing though that impacted us in the last quarter was the amount of surgeon movement, particularly in our top 10 accounts. I think six out of the top 10 accounts had surgeons that had kind of departed or were practicing to the normal levels that they typically do. And so, there is some of that still at play, that's just a temporary kind of dynamic. But our top 10 sales as a percentage of total sales went down fairly dramatically last quarter. And we're still seeing kind of the dust settle in terms of where they've moved to and that particular movement. So I think there is more – every account has some kind of individual dynamics that we’ve also factored in.

Got it. So it's turned in the right direction, great to hear. Last one, Mike, and sorry to monopolize the call here. But it was just on the commentary on a reduction in the number of patients needed on the vitiligo side. Is that contemplated in the second half of 2023 commentary, could it be sooner, if the number comes down? And then when we're going to get a better sense for whether or not that's going to be the case? Thank you.

Sure. So I'm not sure that I understood the question relative to vitiligo. Are you asking when we anticipate the recruitment to take an uptick?

I think what you were saying, Mike and I may have misinterpreted, so forgive me, but it just sounded like, the number of patients could be lower potentially than you had thought initially and you may get some updates with FDA on that.

Yes. Actually what we're doing is, starting a multimedia campaign and we decided specifically not to do it in the last quarter while there were still ongoing vaccinations and a lot of COVID related restrictions. So we've started this basically in April and this is digital radio, radio with social media and we believe that that's going to really drive recruitment. Andy Quick, our CTO is on the line as well, and I'm going to hand it over to him for any additional color or commentary on recruitment in our vitiligo trial.

Thanks Mike. Hi Matt. Just to add to that, the – I don't have exact detail concerning the timing of dropping an arm. Our planning at the moment is such and we're optimistic that we will complete recruitment this year. So this is very much a dynamic situation for us influenced by the incoming data from our feasibility program. So hopefully that kind of rounds out the answer for you.

Yes. We’re very encouraged by the vitiligo indication and its recruitment coming up. So a lot of the patients, just one last bit of color or commentary here, a lot of the patients that are being referred don't have photographic evidence of stability over the last year. So waiting for additional time period to make sure that these are indeed stable vitiligo patients before we treat them, so we don't get failures, is causing a bit of a delay relative to that enrollment bump that we anticipate.

Got it. Very helpful. Thank you so much.

Sure.

Thank you. Our next question comes from the line of Josh Jennings with Cowen. Your line is now open.

Hi, good afternoon. Thanks for taking the question. I apologize for the technology glitch. Wanted to start off and ask about the strategy to go deeper into your current customer base form those accounts and move into this smaller burns, you guys had a great presence as you called out in the prepared remarks at ABA and Boswick in another conference. And just wanted to learn if there is any significant data coming out of there that will facilitate this move down the burn size to live smaller burns? And then also any other details in terms of that strategy of moving from those larger sized burns down to smaller?

Sure, Josh. Thanks, and again, I'll start off with an answer and then pass it over to Erin Liberto, our Chief Commercial Officer. Really what we're looking at there is the natural progression of the adoption curve in these various centers where they start with the larger TBSA burns, the deeper ones where they're utilizing RECELL along with a widely meshed autograph and then progressing to smaller wounds and less deep wounds using RECELL alone. And that's what we're actually indeed starting to see, and this is exactly what we had in mind for our strategy and our plan, so that's moving along well. And with access to the burn accounts as restrictions relax, we anticipate that our reps are going to be able to get into those accounts not just for procedures and dressings and actually helping out, but for business development moving forward and getting new burn surgeons to actually adopt the RECELL system. And with that, I'm going to pass it over to Erin.

Okay. And I think you hit it, but just a few things to add there. So sales calls are still somewhat challenging, but we do know that education and value added education is permitted, right? And so we've certainly gone very deep in that particular area. We've got some simulation-based training, we're rolling out some virtual reality training as well. And then as I said, some local events that we're having local live events. And so our strategy is all about the training, but not just the surgeon training, it's all levels of the organization within the hospital, whoever is kind of exposed to RECELL. And so, it's kind of all hands on deck kind of a surround the customer from all angles from a training perspective and very different types of training, right? Just to keep RECELL top of mind and then clearly as it opens up even further, we'll be able to do – to be doing more. But this transition to smaller burns has been something that we kicked off more than a year ago, when we saw that there was interest in really using RECELL not just for large burns. And so it's something that we've been showing casing through kind of faces campaigns through different promotions, but also podium, presentations as well. There is been a lot of kind of energy on it. So it's just been a natural progression that we see as Mike said from a typical surgeon adoption perspective.

Understood. Thanks. And then just two questions on vitiligo. The first, I just wanted to follow-up on Matt’s question, just to make sure we're clear on the trial. You may have – I interpreted your remarks as a potential to drop one of the expansion ratio arms that is currently in the trial design, because of some of the feasibility data. Is that the correct interpretation? And when will you be alerted to the potential of eliminating expansion ratio arm, or was that not correct?

No. So it is the correct interpretation, Josh, you're right on the money on that relative to dropping one of the expansion arms. And this is based upon what we're seeing in the feasibility patients, where each patient is getting all concentrations, one to five, one to 10 and one to 20. And – any additional commentary, Andy?

We don't have exact guidance as yet on timing Josh.

Okay, great. No, but thanks for clearing that up. You were clear, I just want to make sure I was clear. And then the last question is just on, any feedback you can share, maybe not from your principal investigators, but if there is any, you can share just in terms of your experience with RECELL and vitiligo or any international experience? And then whether we could see any other publications this year on RECELL and stable vitiligo from the Netherlands or anywhere else in Europe? Thanks for taking the questions.

Yes, I’ll talk about – yes, thanks Josh, again, I'll pass it over to Andy in a moment. But as you’ve probably heard before, we have a lot of legacy data for treatment of patients with the RECELL system who have stable vitiligo over 1,000 patients in China and eight peer reviewed publications showing positive outcomes. And so far it's prospective while we're doing the trials, is there anything else ongoing Andy?

No.

Okay, so nothing else right now, Josh.

Great. Thank you very much.

Thanks for your questions.

Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open.

Great. Thank you. Good afternoon, everyone and thanks for taking the questions and Michael, nice to have you on the call. Maybe just the first question kind of dovetails with both Matt and Josh’s questions on the smaller burns, but the question relates to the dynamics of where these burns are taking place. And so there is clear, obviously a clear push into smaller burns, which will then seed the market for the use in outpatient. Given the pasture status payment dynamics that are in place right now, I'm curious if you could talk a little bit about kind of where the smaller burns are taking place, whether the lack of pasture is prohibitive, or you can still see a lot of adoption in the inpatient setting, but with say smaller burns and just kind of that overall interplay between those dynamics.

Yes. So the smaller burns are pretty much occurring. If I get your question correctly, in the same patient populations that are having the larger burns. And they've always been there, it's really just a factor of having a significant number of surgeons who have moved along that adoption curve and are now actually treating those smaller burns, so we're getting more smaller burns treated. And you're right that does actually move us toward the outpatient market opportunity which we are awaiting CMS’s C code and we anticipate at this point that we'll get the C code by early 2022, January, if not before. Any other color or commentary, Erin?

Yes. I guess, it's interesting and how do you define smaller burns and maybe just to put it in perspective, right. So a 10% total body surface area, which inpatient is considered a smaller burn, I mean, that's the size of the limb, right? And so we're talking about 30% total body surface area are smaller is what we're considering on the smaller side. So those are still massive burns, right? They're just happening much more often than above 30%. So to put it in perspective, you've got some kind of midsize burn centers that to get the really, really large burns, they might only get one at border, right. And so if we're really looking at how can we quickly penetrate in these accounts and establish RECELL as a standard-of-care, you can't wait for only those large burns, because they'll forget how to use it, and they won't become independent, right? So we're really pushing, training, getting comfortable on smaller burns, and essentially anytime you bring anyone in from surgery, why wouldn’t you use RECELL. But just to kind of clarify that, the burns are still quite large, even though I guess we're calling them small. We're just seeing a growth – the growth is being skewed towards the smaller size. Hopefully that helps.

That’s very helpful, Erin, and certainly below that – those levels that 30% TBSA is still a significant burn. So it makes a lot of sense. Just a follow up on the – Mike, I think you had indicated that there could be an opportunity potentially with the pediatric label, to expand that label. And so we know there's a lot of data out there about the burn centers in the U.S. But maybe you could just talk a little bit about kind of where pediatrics is treated, whether that's in those burn centers, whether that's children's – dedicated children's hospitals. And if so, does that require you to kind of work your way through the vet committees that you initially had to go through with the burn centers in those pediatric hospitals?

So I'll start off and then I'll pass it over to Andy and Erin for some additional comments if they have them. But for the pediatric label what we're looking at is a retrospective analysis of our compassionate use and continued access to data. And we're in active dialogue with FDA on getting the pediatric indication based upon those data, as opposed to the ongoing clinical trial in pediatrics that is running right now. Relative to the treatment of pediatrics, there's a combination of, I would say, that most of the adult burn centers treat adults and peds and pediatrics are being treated now off-label. Of course, we cannot and do not promote it. And there are specific pediatric sites that we'll need to go through back and that have not received value analysis committee approval because we haven't been able to call on them because they're specific pediatric centers. And those will be new. Erin, anything additional that you might want to add.

I think the broad majority of the 99 accounts that we have. The majority of them have pediatric departments or pediatric affiliations, right. So there are a handful of kind of new pediatric accounts that an expansion of a label would allow us to kind of make a run after. But that's – for in broad strokes, the majority of burn centers treat pediatrics as well. They're not solely focused only on pediatrics or only on adult.

Okay. Thank you for taking the questions and congrats on all the progress this quarter.

Thanks Ryan.

Thank you. [Operator Instructions] Our next question comes from the line of Brooks O'Neil with Lake Street Capital. Your line is now open.

Good afternoon, everyone. And thanks for all the information. I was just going to start with a couple of quick questions on RECELL in the burn market. And then have one question on vitiligo. So maybe the combining two questions, you have 99 burn centers using your product that leaves roughly 30, that aren't. And I'm just curious if you could talk about what you're seeing from the 30 that aren’t and is this something that you think you can do to get them to start using RECELL? I mean, the performance of the product is so superior. It's hard for me to believe that burn centers don't want to use it, but tell me what you guys are seeing.

Okay. Again, I'll start off and then pass it over to Erin. You're absolutely correct. We're in 99, out of 136 ABA accredited burn centers. And it's really not that we haven't been able to penetrate those 36 additional accounts. It's really been that our focus has been on the larger accounts and where we see the larger opportunity moving forward is to dig more deeply into those accounts, get more procedures, more surgeons on board, as opposed to getting more of these smaller centers onboard. That's going to be more return on investment for us going forward.

Make sense.

Yes. Anything to add, Erin?

Yes, the other thing I would add is those 99 accounts are what we consider have a value analysis approval and have placed an order and done procedures. We have many other accounts that are in the evaluation phase, but sometimes it takes on average we're around six months to get through a value analysis committee, but with time it gets longer and longer. So there's some hospitals it's not uncommon to take a year to get through that, right. So we have quite a few accounts that are currently either evaluating the product and doing procedures but they just don't have official value analysis approval quite yet. So the only accounts that we're kind of still prospecting, that aren't somewhere in kind of that business development pathway are typically pretty small accounts. There's some burn centers that only do about 50 admissions per year. So they're – we're in discussions with all of them and prospecting but I would say, there's also a very big chunk of customers that are kind of coming down the customer kind of funnel.

Absolutely. Okay. Just a second question, sort of along the same lines, but if I was listening correctly earlier, I think Mike said that you have about 50% of the surgeons actively using the product, maybe about 80% of the doctors trained. And I was just curious, what's holding up doctors who've been trained from becoming active users of the product?

Go ahead, Erin.

Sure. So in the past quarter, 50% of all burn surgeons did it at least one procedure with RECELL. When we talk about training, we have – this goes back to your prior comment, which is we've trained more accounts than – that are closed and those 99 accounts, right. So there's a lot of surgeons that are at accounts that don't necessarily have value analysis approval quite yet. They're either in the evaluation phase. But they've been officially trained, but the hospital hasn't given official permission to start ordering and purchasing the product yet. So that's the difference between – and then some of them are just very small accounts. They might've not had a procedure come in, but in broad strokes that has to do with – the delta has to do with surgeons at accounts that aren't active yet. Does that make sense?

Okay, cool. Yes, absolutely. Let me just ask you one more, if I can. I think I heard Mike say that the U.S. opportunity with vitiligo is $5 billion, which is really clearly the big prize opportunity that could be out there in the relatively near-term, recognize that you got to complete the trial, recognize you've got to get approval to market for that indication here in the United States. But can you just talk to us a little bit about how you see AVITA going after that $5 billion market and what you think some of the really big keys are to having success within the next couple of years? Thanks a lot for taking my questions.

Thanks, Brooks. I'll start off and again pass it back over to Erin. Really what we're going to need for vitiligo going forward is going to be a new sales force that is focused on interventional dermatologists and plastic surgeons. They'll generally be doing this as an office procedure. It won't be an in-hospital procedure. And Erin and her team are working on the details of exactly how we're going to get after this. We're going to be starting with a target of 1,000 interventional dermatologists and plastic surgeons. And I'll now turn it over to Erin to give you a little bit more color on that.

Yes. So it's a very exciting market, and when we look at that $5 billion total addressable market that represents essentially anyone in the United States that have stable vitiligo that's eligible for surgery, right. So that's the size of the entire United States, to begin with, we're going to be focusing on physicians that specialized in vitiligo or a more what we call procedural dermatologists and likely around 1,000 doctors that Mike just mentioned. So in the shorter term, we're looking at maybe a serviceable addressable market of closer to $750 million, but then with time we'll be expanding to kind of more and more sites. The other thing that we'll have to do a lot of work on right is make sure that there's appropriate payment. This will be a mix of cash pay as well as reimbursed. So we have to make sure that we have the appropriate coding and then also the appropriate coverage and training in place. So it is, I think very exciting, but I think we'll be taking a kind of, there's a few very important milestones that we're going to have to hit before maybe running after that broader $5 billion market.

Great. Thank you very much for the color.

Thanks, Brooks.

Thank you. Our last question comes from the line of Lyanne Harrison with Bank of America. Your line is now open.

Good morning all or good afternoon if it is. Thank you for taking my questions. The first one I think is probably for Erin. You mentioned earlier that the sales calls are still challenging. Can you just clarify for me, what does that mean exactly and where the challenges are and the hurdles are, because I'm just trying to think about how we as COVID – as we exit COVID what that means for revenue going forward?

All right. So if in general, and this is not just for RECELL, I think this is a general just when you're selling into hospitals, you're allowed to enter if you've got a purpose, right. Which is either supporting a case and you've been kind of deemed necessary or invited, or that you need to kind of provide value, meaning training employees in the hospital so that they can use the product in the appropriate way, right. So hospitals in general, due to COVID are frowning on just drop by visits for no purpose, other than to kind of have a coffee and try and sell, you have to have some sort of documented purpose in order to kind of be allowed to enter the hospital for the most part. And that's what we're dealing with, and that's not – that's across industries. So that's what I mean, when I say sales calls, you can try and call people, right. But you can't just try and what we call case capture, right. Where you swing by a hospital and you just say, okay, who's in the burns unit. How about we try RECELL, like that is incredibly difficult. So you have to kind of use – there's just other opportunities to kind of be present. But it's more about kind of by invitation or by need versus just swinging by and checking in.

And as COVID abates, we do anticipate that the usual cadence of being able to swing by and visit a burn center will return.

Okay. And just to follow up on that, as we say about COVID abating and this is to follow on an earlier question about run rate. So if we think about what the exit run rate was for the March, the month of March and whether or not – is there any possibility that your guidance for the fourth quarter might be slightly lighter given that COVID still abating, you've been getting better access to the hospitals and can do some of those droppings and case capture?

I'll think I'll pass that over to Michael Holder, our CFO.

Yes, actually the $5 million to $5.3 million U.S. guidance that we're giving is what we realistically expect. Erin and her team have done a very detailed build up from account to account. As mentioned before, run rates did improve in March, but at the same time, they're still relatively hampered by COVID. So that's actually what we're expecting to do.

Okay. Thank you. And then Michael, another follow-up question for you is around the BARDA contract and the RECELL for emergency use. So obviously we've had the first delivery come through in this quarter, how many more quarters of RECELL revenue can we expect with BARDA?

Well, Mike Perry here. So for the vendor managed inventory for the national stockpile will account for the rest of that in this quarter – this coming quarter. But then there will be ongoing maintenance of that vendor managed inventory, which will be about 1.9 million that will be spread out over approximately three years.

Okay. And can reach – kind of an even spread out for that three years?

Michael?

Yes. Thank you. Good question. Yes, that is amortized on a straight line basis over those three years.

Okay. Thank you very much. And just one final question before I go is around expectations around margin. So can we expect the gross margin to improve going into the next quarter or fourth quarter, given the product mix in the light of waiting on BARDA revenue?

Michael, go ahead.

Thank you. That's a good question. We would expect some modest improvement in our fiscal fourth quarter as the mix of BARDA revenue compared to total revenue decreases somewhat. But then going forward after that, we would expect to be back in our normalized range of margin in the low to mid 80%.

Okay. And then on lower OpEx, are there any savings that might be able to permanent nature going forward?

Well, as the relatively new CFO here obviously one of my core function is maintaining cost controls and looking for cost efficiencies. So we're in the process of doing that currently as we continue our planning and budgeting processes. So yes, we would see some opportunities for that, but at the same time, we were a growing business where we have increasing expenditures for various pivotal trials and for various other pipeline activities. So it's really a balancing act, but relative to OpEx in guidance for the fourth quarter, we would expect those – we would expect our OpEx to tick up slightly, but still be in the relative same range.

Okay, fantastic. Thank you very much.

Thank you, Lyanne.

Thank you. There are no further questions. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.