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These ASX medical shares fell double figures in July – are they a buy?

It seems investors in these two ASX medical shares have taken the opportunity to lock in recent gains, sending prices down significantly in July. The Avita Therapeutics Inc (ASX: AVH) share price fell more than 30% in July as sales faltered in the face of COVID-19. The PolyNovo Ltd (ASX: PNV) share price fell nearly 14% despite reporting record sales in June. Both companies operate in the medical device space and will potentially see strong demand for their products over the coming decade. Coronavirus may have dented short-term demand, but are these ASX medical shares worthy long-term buys?  

Avita Therapeutics 

Avita Therapeutics produces a spray-on skin system used to treat burn wounds. The ‘Recell System’ allows a suspension of spray-on skin cells to be produced using a small sample of the patient’s own skin. This can be sprayed onto a wound, improving healing and scar appearance. Avita is primarily focused on the United States market and redomiciled to the US earlier this year. Growth in sales of the Recell System were strong in FY20, growing 213% over the prior year. But the rate of sales growth took a tumble in the fourth quarter with sales revenue of US$3.79 million compared to US$3.78 million the previous quarter. 

Lockdown measures meant there was a reduction in accidents leading to burn injuries. Access to facilities and patients was also limited due to infection control procedures aimed at preventing the spread of coronavirus. A re-prioritisation of hospital resources meant April sales fell to their lowest level in 2020. Encouragingly, procedural volumes resumed growth in May and June with the benefits of the Recell System, which include fewer surgeries and reduced hospital stays, embraced by surgeons. The system is also being investigated for use in treating vitiligo, scar reconstruction, and for aesthetic applications. This could substantially increase the addressable market for this ASX medical share. 

The Avita share price is currently trading at $6.12 which is a 1% gain for the day so far. 

PolyNovo

PolyNovo produces ‘Novosorb BTM’, an implantable dressing that can be integrated into the body as it heals. The product is produced using a biodegradable polymer, which helps the body to use its own mechanisms to repair damaged tissue. Novosorb BTM is used in the treatment of severe wounds or burns where the dermal layer of the skin has been lost and requires a graft to close. PolyNovo reported record US sales of Novosorb BTM in June, with a 67% increase in hospital accounts over FY20. The company also made its first sale in the United Kingdom and expects additional near-term sales from this market. 

Sales of Novosorb BTM tend to be lumpy, but there is a strong upward trajectory with product sales in FY20 expected to double those of FY19. In a July update, PolyNovo Chairman, David Williams, said “While FY20 sales will show impressive growth over FY19, the sales run-rate is more impressive and should be a better indicator of the near-term future”. PolyNovo’s polymer has potentially even wider applications. The company is currently working on hernia repair and breast reconstruction products. Both areas have large addressable markets and would diversify the revenue base for PolyNovo.  

At the time of writing, the PolyNovo share price is trading 0.91% up for the day at $2.22.

Foolish takeaway

I believe these two ASX medical shares have serious long-term potential. While coronavirus may have put a dampener on short-term demand, longer-term indicators are positive. This means recent pull backs in each company’s share price may provide an opportunity for long-term investors to take a stake at a discount. 

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Kate O'Brien owns shares of Avita Medical Limited and POLYNOVO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Avita Medical Limited and POLYNOVO FPO. The Motley Fool Australia has recommended Avita Medical 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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Kate O'Brien