One of the largest sectors of the Australian stockmarket – at least in terms of number of companies – is life sciences. At last count, there were about 93 such companies.
Many of the Australian companies are minnows, doing great things on the scientific front, but going relatively unnoticed by the professional investment community.
Regenerative medicine company Avita Medical Limited (AVH) is a case in point. It is capitalised at just $44 million.
Avita is commercialising its ReCell technology, which involves using a patient’s own skin cells to create a skin graft analogue that takes away the risk of rejection or scarring. ReCell was developed by plastic surgeon Professor Fiona Wood, clinical professor with the School of Paediatrics and Child Health Care at the University of Western Australia in Perth, consultant plastic surgeon at Royal Perth Hospital and director of the McComb Research Foundation.
In the early 1990s, Wood treated burns patients at Royal Perth Hospital with US technology that entailed growing sheets of the patient’s own skin in tissue culture. Wood and a colleague, Marie Stoner, took this technique and further honed it into an in-theatre preparation of a spray-on suspension consisting of cells derived from a small biopsy of the patient’s own skin.
These skin cells are subjected to enzymatic heat and mechanical disaggregation, put into suspension, and sprayed back on to the patient’s skin. The ReCell unit completes the suspension process in 15 minutes, and the spray-on skin is ready for application – and is sufficient to cover an area up to 80 times the size of the biopsy. The cells multiply and create new skin tissue.
Once the ReCell spray-on skin is applied, it eliminates the daily dressing change, which is a potential avenue of infection attack. When the dressing comes off, after five to seven days, there is regrowth.
Because ReCell uses the patient’s own skin, the body will not reject the treatment. Besides improved healing and reduced scar formation, ReCell allows the reintroduction of pigmentation into the skin (and treating pigmentation disorders.)
Also, because skin cells contain information to know what a person’s skin should look like – for example, facial skin cells ‘know’ they’re facial skin cells, and signal and recruit other cells, including nerve cells, to come in. This ability of the body to ‘know’ what 3D situation it should have opens up potential use for ReCell in plastic surgery.
(The original company set up to commercialise ReCell, Clinical Cell Culture Limited, disillusioned investors with slow progress, and its share price struggled. This led to the merger of the company with Visiomed and its renaming to Avita Medical in 2008. Wood remains a non-executive director and shareholder of Avita Medical.)
Slowly, Avita has put runs on the board. A Phase III Food & Drug Administration (FDA) trial is in process, involving ten US burns centres, helped by $2.6 million in grant funding from the US Department of Defense, the US Army, and the US Armed Forces Institute for Regenerative Medicine (AFIRM). Data from the trial is expected next year.
AFIRM’s interest in ReCell comes through its dedication to bringing what it calls “transformational technologies” in regenerative medicine to wounded soldiers by developing clinical therapies and advanced treatment options. Trial co-ordinator Dr James H. Holmes IV, Director of the Wake Forest Baptist Medical Burn Center and Program Leader for the Wake Forest-Pittsburgh Consortium of AFIRM, says AFIRM views the ReCell FDA study as a high-priority project and describes ReCell as a “potential game-changer” in the treatment of burns and acute wounds.
ReCell is already patented: it is CE-marked, meaning approved for sale in Europe, TGA-registered in Australia, has had a patent granted by the Japanese Patent Office and is SFDA-cleared in China.
Chicago-based investment research firm Zacks Investment Research has certainly noticed Avita. Last month, it initiated coverage on the stock, with a ‘buy’ recommendation and a highly impressed tone, saying the firm is a “big fan” of the ReCell technology. Zacks says the ReCell system is “simple, fast, safe and effective,” and describes it as the “ideal product” to treat burns and scalds in children.
Zacks’ report was on Avita’s American Depositary Receipts (ADRs), which trade on the OTCQX international marketplace in the US. Each ADR represents 20 ordinary shares. When the Zacks report was published in mid-June, the Avita ADR price was US$2.05: Zacks put a target price on the stock of $4.00. The ADRs have since moved to $2.55.
Over the same period, the Australian shares have moved from 10.5 cents to 14 cents.
“The market capitalisation at only US$32.5 million is far too low and highly attractive for long-term investment in our view,” said Zacks in its report. But it also described an investment in Avita Medical as “ultra-high-risk, and speculative.”
The beauty of ReCell is that it is a platform technology, with a wide range of applications, from burns to chronic wounds, such as leg ulcers, all the way up to aesthetics. Avita is targeting three very different markets – burns, chronic wounds (particularly diabetes-caused ulcers in the developing world) and aesthetics/cosmetics. At the moment the sales revenue comes from Europe, and 85 per cent of that comes from burns.
Ultimately Avita expects ulcers to be its most profitable segment by volume, while conversely, the most profitable segment by value will be aesthetics/cosmetics in the developed world – a market in which people are prepared to pay a lot of money.
Zacks says the balance sheet is “surprisingly strong for such as small company.” The company held US$12.3 million in cash and investments as of March 31, 2013, and reported nearly US$15 million in positive working capital and US$14.5 million in positive shareholder equity as of December 31, 2012.
While Zacks Investment Research “loves the concept” of ReCell, and believes it has a potential sales opportunity in the US alone of US$100 million a year, it stresses that the Phase III FDA trial is “pivotal.” But as the investment research firm concludes: “One simply cannot look at the case study data (on burns and scalds) especially in toddlers and infants, and not root for success of this trial.”
