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Why I think Avita Medical shares are a buy in 2020

With an impressive run as one of the top performing Australian stocks of 2019, Avita Medical Limited (ASX: AVH) experienced over 700% share price growth last year, resulting in a market cap of $1.66 billion (at the time of writing) and earning it a place in the S&P/ASX 200 (INDEXASX: XJO).

The company has made a name for itself primarily through the development of its revolutionary RECELL technology.

What is all the hype about RECELL?

RECELL is a regenerative medicine with undeniable results, contributing to the company’s recent success. It is currently used primarily in the treatment of second and third-degree burns with impressive efficacy. The technology has shown to be significantly more effective than the current split-thickness skin grafts method which leaves a noticeable scar on the site of procedure. RECELL allows for treatment with a drastic decrease in life-long scars. Comparing the amount of donor skin required for burn victim treatments, studies have shown the RECELL system has a 97.5% reduction in the donor’s skin requirement for second-degree burns, and a 32% reduction for third-degree.

The company reports that RECELL has been used more than 8,000 times to date commercially, with no observed safety signals. Doctors reportedly found that using RECELL was significantly less painful for patients while providing results faster.

Avita Medical is a global operation with RECELL approved in the United States, Europe, China, and Australia. They are currently in the process of being approved to market in Japan, with JPMDA approval expected in 2020. The company has proactively secured a collaboration with COSMOTEC to market and distribute RECELL treatments in Japan after approval.

In addition, RECELL is being researched to treat paediatric scalds and soft tissue reconstruction by the end of Q1 2020, and repigmentation for vitiligo by Q3 2020. Completing these milestones provides Avita Medical with avenues into markets beyond burn treatments. The company currently values the opportunities of these markets at over US$1.1 billion.

What about Avita Medical’s financial performance? 

After only one year of RECELL being used in the US, which is the technology’s largest market in terms of sales, Avita Medical is well positioned to continue its growth phase into the future.

Total revenue for the year amounted to $9,974,801 with a 56% increase in sales from Q2 to Q3. These sales were maintained into Q4 of the year.

Following this trend, Avita has reported growth in its new accounts and trained burn surgeons every quarter, with a total of 60 cumulative accounts and 166 cumulative physicians.

The company is also well financed with $124.6 million cash in bank and low debt (current ratio of 5.5 and a debt-to-equity ratio of 0.2%), as of 31 December 2019. Total cash outflows for the next quarter are estimated to be $12.3 million. Having a significant surplus of cash provides Avita with the necessary cash flow to continue progressing through its development pipeline without needing to raise funds.

For these reasons, I think 2020 provides significant growth opportunities for Avita Medical Limited and investors.

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Motley Fool contributor Jordan Liu owns shares of Avita Medical Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Avita Medical Limited. 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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