Are Avita Medical shares a buy after rocketing 500% YTD?

The Avita Medical Ltd (ASX: AVH) share price has risen more than 500% since January. Is it a buy?

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The Avita Medical Ltd (ASX: AVH) share price has risen more than 500% since January. This may lead to some investors avoiding Avita Medical shares in fear of paying too much. However, even after this massive price rise, I believe the shares are a tempting investment, which is a testament to the massive potential of this company.

What I like about Avita Medical

Avita Medical develops and sells technology that is used to treat burns and other skin conditions. Its RECELL system was launched in the US in January and has been approved for the treatment of adults with acute thermal burns. Since its launch, it has already been ordered by 41 of 132 US burn centres. Additionally, recent studies suggest that for the treatment of burns the RECELL system reduces hospital costs as well as patient recovery times.

Avita Medical believes the potential market for its RECELL system is more than $2 billion in the US alone. Its RECELL product is also approved in Australia, Europe and China with Avita Medical also seeking approval to enter the Japanese market. With these approvals, Avita Medical seems poised to finally be able to capitalise on its long-held potential.

Reasons to be cautious with Avita Medical

Avita Medical has a market cap of $889 million, yet is only expected to deliver $17 million in revenue in FY19. Its market valuation is therefore based on potential rather than any long-standing track record of delivering profits to shareholders.

The opportunity for its RECELL product may be worth more than $2 billion in the US, however, further approvals will be required before the vast majority of this potential can be accessed.

Avita Medical has released a lot of positive news of late but this might not always be the case. After all, the company has been listed since 1993 but it was only this year that Avita was able to launch a product into the large US market. A future without setbacks or delays is unlikely.

Foolish takeaway

I believe investing in Avita shares at current prices will yield a long-term profit. However, I also believe that the best plan of action will be to hold off buying Avita's shares until there is more evidence of strong sales growth. This will make a higher share price more justifiable. There is also the potential that the Avita share price might fall if sales are not as strong as expected.

If you are desperate to enter the biotech space, Starpharma Holdings Limited (ASX: SPL) is another ASX listed company worth considering.

Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Starpharma Holdings Limited. The Motley Fool Australia has recommended Starpharma Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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