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Why I think the Avita Medical share price is a buy this week

The Avita Medical Ltd (ASX: AVH) share price made a 52-week high last Wednesday morning (15 January), hitting $0.76 after an explosive year in 2019. Avita shares dipped slightly towards the end of last week, but the shares recaptured their gains today to close trade at $0.76 per share.

Avita Medical is a biotech company that specialises in skin regeneration technology. Its flagship product ‘RECELL’ is a non-invasive skin rejuvenation treatment that will replace the current standard of care for burn victims. The reported results of this new medicine are nothing short of incredible.

So, how much more upside does Avita Medical have after a 700% increase in 2019? Let’s find out.

The story of RECELL so far

Approved for use by America’s Food and Drug Authority in September 2018, the RECELL system’s primary use case is treating burn victims. RECELL is a spray-on-skin that is fabricated from a small sample of the patient’s own skin. The amount of skin taken from the patient is significantly less than a traditional skin graft and leaves little to no visible scarring.

Clinical tests conducted on 7,000 patients across the US reinforced Avita’s thesis that the RECELL system is far superior to the current standard of care for burn victims.

Avita has also gained TGA Certification in Australia and CFDA certification in China, with RECELL slowly being introduced to practitioners in these regions with the expectation that it will become the new standard of care in the near future.

The US market for RECELL is estimated by Avita to be worth $2 billion annually, and the current market that RECELL is approved in totals $200 million. This could be extended to $700 million annually in the near future when RECELL becomes approved for use in paediatric medicine and 2nd and 3rd degree burn victims.

Other applications of RECELL

Due to RECELL’s regenerative properties it can reportedly treat more than just burns. Avita has been approved to start trialling RECELL on a broader range of burns and skin conditions.

Pilot studies for soft tissue reconstruction and re-pigmentation treatment for vitiligo are due to start during the second and third quarter of 2020. These markets represent approximately $850 million yearly.

The most compelling market that RECELL may be useful in is cosmetic rejuvenation. Avita stated in its corporate presentation on 7 August 2019 that Americans spend US$16.5 billion each year on cosmetic procedures. There are 10 million injectable cosmetic procedures each year and 3 million procedures aimed at improving skin tightness, texture and tone.

Avita believes that cornering 5% of this market could represent a $500 million opportunity.

Foolish takeaway

Biotech companies are worth nothing until they are FDA certified and present proven results of the potential drug/treatment. The Avita Medical share price in 2019 tells a story of a biotech with a product that works and is ready to go to market.

Investors can see the potential worth of this technology. The research produced by Avita and other independent labs point to the RECELL system becoming the new standard of care for burn victims.

Avita is heavily investing in research to increase the addressable market of the RECELL system. The drug could potentially treat genetic skin disorders and have cosmetics applications.

Most of the risk that biotech companies present is during the pilot study phase, which Avita has passed with flying colours. The company is now aggressively expanding the potential use cases for its RECELL system with more research.

Even after 7x returns in 2019, I think the upside for Avita Medical Ltd is substantial. Happy bidding!

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The Motley Fool Australia has no position in any of the stocks mentioned. 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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