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INSTITUTIONAL EQUITY RESEARCH | January 30, 2017

Avita Medical BUY Bruce D. Jackson


Senior Research Analyst
612-326-9536
(AVH.AX AUD 0.105) Price Target: AUD 0.25 bruce.jackson@lakestreetcm.com
(AVMXY -- $1.69) $4.00 www.lakestreetcapitalmarkets.com

Company Update: 2017 A Big Year For Avita, ReCell Could Changes Previous Current
Gain FDA Approval Around Year-End; Buy Rating: -- BUY
Price Target: -- AUD 0.25
Note: At date of publication, AUD 1.00 equaled USD $0.75. ASX:ADR share ratio
FY17E Rev. (M): AUD 9.6 AUD 8.2
approximately 16:1. FY18E Rev. (M): AUD 25.3 AUD 26.7
FY17E EPS: -- AUD (0.02)
We believe 2017 is going to be a big year for Avitas spray-on skin technology, a FY18E EPS: -- AUD (0.00)
novel means of treating burns, chronic wounds and skin pigmentation disorders.
ReCell, which has the ability to lower length-of-stay and treatment costs for burn Profile
patients by more than 42%, could be approved by the FDA around year-end, Price: AUD 0.105
providing a de-risking event for the shares. Despite much progress, including a Shares Out. (M): 532.8
Market Cap. (M): AUD 67
$61.9 million partnership with BARDA (the Biomedical Advanced Research and Avg. Daily Vol (K): 259
Development Authority), we believe the company remains unknown and under- Insiders Own: 1%
appreciated. If all goes as planned, we estimate Avita can reach breakeven in Short Int.(M) / % of Float: NA / NA
Tan. Book Val. / Sh.: AUD 0.01
2019 with revenue of AUD 37 million ($28 million), supporting our AUD 0.25
Net Cash / Sh.: AUD 0.01
price target (5x our 2020 EV/Revenue estimate discounted to the end of 2017). Div / Yield: NA / NA

HIGHLIGHTS AUD
Rev. (M) 2016A 2017E 2018E
Novel, Spray-On-Skin Technology The Companys patented technology
Sep
for a rapid skin graft culture and spray-on delivery system, dubbed ReCell, Dec 1.3 3.6 5.0
creates a suspension of skin cells and growth factors from a patients own Mar
skin that can be used to treat burns, chronic wounds and skin pigmentation Jun 2.3 4.6 20.3
disorders. Both clinical and health economic data demonstrate the FY 3.6 8.2 25.3
superiority of ReCell over the current standard of care. In one study, EPS 2016A 2017E 2018E
patients with ReCell surgery were likely to have a shorter length of stay Sep
compared to patients with split skin grafting (SSG) surgery alone, with 42% Dec (0.01) (0.01) (0.01)
cost savings. Mar
Jun (0.01) (0.01) 0.00
FDA Supportive, De-Risks Story -- On October 19, 2016, the FDA allowed FY (0.02) (0.02) (0.00)
compassionate use of ReCell for up to 48 patients with insufficient healthy EBITDA (11.2) (11.3) 0.0
skin available for standard skin grafting of their injury and increased the
number of hospitals that can deploy the protocol to 15 sites. This expansion
Valuation 2016A 2017E 2018E
is in addition to the continued access approval that was announced on
EV/Sales 14.6x 7.3x 2.6x
October 5, which allows U.S burn surgeons participating in Avita Medicals EV/EBITDA NA NA NA
regulatory trial to treat up to 60 new patients. Both FDA actions
demonstrate confidence in ReCell and bode well for the future.
Management
Already Have $62 Million BARDA Commitment In September, 2015 Avita Chairman Lou Panaccio
was awarded a five-year contract with the Biomedical Advanced Research CEO Adam Kelliher
and Development Authority (BARDA), worth up to $61.9 million, which CFO Tim Rooney
includes funding for late-stage clinical development and the purchase of
more than 5,000 ReCell devices as part of a U.S. mass casualty preparedness Company Description
program. The initial committed funding of $16.9 million will be used to stock Avita Medical of Perth, Australia, is a commercial-
inventory and fund ReCells development efforts in the United States in stage regenerative medicine company with
patented technology to create a suspension of
support of the FDA Premarket Approval application mentioned earlier. skin cells and growth factors from a patients own
skin that can be used to treat burns, chronic
wounds and skin pigmentation disorders.

SEE LAST PAGE FOR IMPORTANT DISCLOSURES Page 1 of 25


January 30, 2017

INVESTMENT THESIS AND VALUATION


Avita has been revitalized by a new management team and a new growth strategy
that is about to pay off. The major components of the growth strategy are to
introduce indication-specific product configurations, gain new regulatory approvals
and build out the distribution network in order to expand and capture more of the
total available market. By doing these things, management hopes to increase
revenue and open up business development opportunities like the recently
announced partnership with the Biomedical Advanced Research and Development
Authority (BARDA). The total available market for Avitas tissue repair products are
valued at more than $15 billion worldwide. We think this experienced
management team is placing the company on a track to do more than AUD 200
million a year in revenue with a single-use business model and high gross margins.
New Product Strategy: Repair, Restart, Restore -- The first part of the plan
was completed in March 2016 when the company converted its product line
from one product (ReCell) into three separate CE-marked products which were
customized for their primary clinical applications in burn treatment, chronic
wound treatment and skin repigmentation. The indication-specific strategy
makes it easier to tailor the features, value proposition and pricing of each
product to its market segment.
Backed Up With A Focused Regulatory Strategy -- The strategy to gain U.S.
regulatory approval is making progress, with plans to submit a PMA to the FDA
in late Q1 or early Q2 2017. If all goes as planned, ReCell could receive an FDA
approval for the treatment of burns by Q1 2018. Of note, the FDA granted
ReCell an Expedited Access Pathway (EAP) designation, which provides a high
degree of confidence in the anticipated approval date and allows for the
possibility of an earlier-than-expected approval. Additional clinical trials are
underway to demonstrate how the companys technology can also be used for
the treatment of chronic wounds, as well as skin pigmentation disorders. A
chronic wound study to support U.S. regulatory approval is expected to begin
enrollment in 2017.
Expanding Commercial Operations -- With regard to the commercial
operations, Avita has inked several new distribution agreements since
November, 2015 and plans to establish a direct sales force in the United States
ahead of the anticipated ReCell product launch in 2017. Business development
activities began to bear fruit in September, 2015 when Avita was awarded a
five-year contract with the Biomedical Advanced Research and Development
Authority (BARDA). The agreement, now worth up to $61.9 million after being
expanded by $8.0 million in July 2016, provides funding for late-stage clinical
development and the purchase of more than 5,000 ReCell devices as part of a
U.S. mass casualty preparedness program.

VALUATION
Our AUD 0.25 price target is based on 5x our 2020 EV/Revenue estimate of AUD 59
million discounted to the end of 2017 at 20%. The revenue multiple is consistent
with other high-growth life science companies at an early commercialization stage.
We support our price target with a discounted cash flow analysis which assumes
terminal year 2026 revenue of AUD 222 million with a 3% terminal growth rate,
with the cash flows discounted at the companys weighted average cost of capital of
10.4%. Our DCF analysis implies the shares are worth AUD 0.50 today compared to
our more conservative price target calculation, setting up a favorable risk/reward
ratio for the shares, in our view.

Avita Medical Ltd. Page 2 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Figure 1: Comparable Company Analysis

M ark et Enterprise Gross Rev Grw th EV/Rev EV/Rev


Tick er N am e Price C ap. Value M argin F Y 1 7 -1 8 E 2017E 2018E

IART.O Integra LifeSciences Holdings Corp $41.36 $3,093 $3,673 69.2% 10.6% 3.7 x 3.3 x
WMGI.O Wright Medical Group NV $25.09 $2,592 $3,051 78.0% 11.0% 4.5 x 4.0 x
MMSI.O Merit Medical Systems Inc $25.25 $1,126 $1,436 45.9% 9.4% 2.4 x 2.2 x
MDXG.O MiMedx Group Inc $8.02 $878 $885 86.7% 22.9% 3.6 x 2.9 x
CRY CryoLife Inc $18.25 $599 $617 65.2% 6.3% 3.4 x 3.2 x
LMAT.O LeMaitre Vascular Inc $23.14 $430 $395 71.4% 11.2% 4.4 x 4.0 x
ATHX.O Athersys Inc $1.52 $130 $111 NM (50.5%) 6.5 x 13.1 x
MDWD.O Mediwound Ltd $5.00 $109 $75 -24.0% 129.6% 40.6 x 17.7 x
VCEL.O Vericel Corp $2.65 $85 $117 46.8% 22.2% 2.2 x 1.8 x
CYTX.O Cytori Therapeutics Inc $1.56 $32 $35 47.9% 26.9% 3.7 x 2.9 x
HSGX.O Histogenics Corp $1.54 $25 ($13) 0.0% NM NM NM
DXTR.O Dextera Surgical Inc $1.54 $14 $25 0.8% 253.1% 8.2 x 2.3 x

High $3,093 $3,673 86.7% 253.1% 40.6 x 17.7 x


Mean $759 $867 44.3% 41.1% 7.6 x 5.2 x
Median $280 $256 47.9% 11.2% 3.7 x 3.2 x
Low $14 ($13) -24.0% (50.5%) 2.2 x 1.8 x

AVH.AX Avita M edical Ltd $ 0 .0 8 $51 $47 8 8 .0 % 3 0 2 .1 % 5 .7 x 1 .4 x

Source: Thomson One

COMPANY OVERVIEW
History -- Avita Medicals proprietary technology for a rapid skin graft culture
combined with a spray-on delivery system was invented by renowned Australian
burn surgeon Dr. Fiona Wood FRCS, FRACS, AM and her scientific collaborator,
Marie Stoner. They started working together in 1992 after a school teacher arrived
at their hospital in Perth, Australia with burns covering 90% of his body. This event
motivated the duo to work at night in a laboratory to grow sheets of new skin using
a recently developed tissue engineering technology called cultured epithelial
autograph (CEA). Their first product was in the form of confluent sheets of CEA,
which then evolved into an aerosol-delivered suspension of cell-clusters that
ultimately became the spray-on skin product known as ReCell. The technology
was patented and in 1993 Wood co-founded a company, Clinical Cell Culture (C3),
the predecessor company to Avita Medical. C3 was a research-oriented company
that found additional applications for ReCell in wound healing and in the treatment
of skin pigment disorders. In 2002 the company was acquired by ECAT
Development Capital and went public on the Australian Stock Exchange, changing
its name to Avita Medical in 2008. Today, Avita is a global company with clinical,
regulatory and financial operations in Los Angeles as well as commercial operations
in the United Kingdom and Asia. The companys shares are publicly-traded in
Australia (ASX:AVH) and in the United States with American Depository Receipts
(OTCQX:AVMXY).
New Management Team, New Focus -- Avita recently hired a new management
team and refreshed its Board of Directors to focus squarely on the global
commercialization of the companys novel technology, with a plan to gain FDA
approval for ReCell in the United States for the treatment of burns by the end of
2017. In March, 2016 the company converted its product line from one product
(ReCell) into three separate CE-marked products which were customized for their
primary clinical applications. ReCell was positioned primarily for the treatment of
burns, ReGenerCell for chronic wounds and ReNovaCell for repigmentation and
cosmetic applications.

Avita Medical Ltd. Page 3 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Figure 2: The Revamped Avita Medical Product Portfolio


Product Indication End User
ReCell Burns Burn and Trauma Centers
RegenerCell Wound Healing Hospitals
RenovaCell Repigmentation Private Clinics
Source: Avita Medical

GROWTH STRATEGY
With the addition of new board members and a new management team, Avita
Medical has evolved from a mostly technology-driven company to one which is
more commercially-oriented. The major components of the companys growth
strategy are to introduce indication-specific product configurations, build the
clinical data supporting each products indications for use, and gain new regulatory
approvals to expand the total available market. By doing these things,
management hopes to increase revenue and accelerate business development
activities in a manner similar to the partnership with BARDA (the Biomedical
Advanced Research and Development Authority). Finally, management divested a
non-core respiratory business in order to raise cash and improve focus on the core
business.
New Market Segmentation Strategy -- The first component of the companys
growth strategy was to re-configure the product line to be indication-specific, which
made it easier to tailor the features, value proposition and pricing of each product
to its market segment. As mentioned earlier, In March 2016 the company
converted its product line from one product (ReCell) into three separate CE-marked
products. ReCell is now focused solely on burn treatment, with ReGenerCell for
chronic wounds and ReNovaCell for repigmentation.
Figure 3: Building a Body of Clinical Evidence in Several Therapeutic Areas

Avita Medical Ltd. Page 4 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Clinical Indication RCT Readout


Burns ReCell as an adjunct to Primary effectiveness
widely expanded readout Q1 2017
autografts, for treatment
of mixed-depth (incl. full-
thickness) burn injuries
(US, CTP001-6)
Chronic Wounds ReGenerCell for Feasibility study. First
treatment of hard-to-heal patient treated in May,
venous leg ulcers (UK, 2016. Completion
CTP003) expected Q1 2017.
Chronic Wounds ReGenerCell for Published 2015, British J
treatment of chronic Surg
wounds (China)
Aesthetics / ReNovaCell for Published 2015, J Amer
Repigmentation repigmentation of Acad Dermatol
segmental
vitiligo/piedbaldism
(Netherlands)
Source: Company Reports

Building a Body of Clinical Evidence -- The second objective for the new
management team is to expand the body of scientific evidence in order to gain
regulatory approvals and support the expanded marketing effort. The lead clinical
trial program is in support of a U.S. FDA PMA for ReCell in the treatment of mixed-
depth burn injuries. Enrollment was completed in January, 2016 and the final
patient was treated in April, 2016. The company plans to submit a PMA to the FDA
in Q1-Q2 2017 with FDA approval anticipated in Q1 2018. Other trials are underway
to support regulatory approvals to expand use of the companys technology for the
treatment of chronic wounds as well as skin pigmentation disorders.
BARDA Contract An Important Source Of Funding -- In September, 2015 Avita was
awarded a five-year contract with the Biomedical Advanced Research and
Development Authority (BARDA), worth up to $61.9 million, which includes funding
for late-stage clinical development and the purchase of more than 5,000 ReCell
devices as part of a U.S. mass casualty preparedness program. The initial
committed funding of $16.9 million will be used to stock inventory and fund
ReCells development efforts in the United States in support of the FDA Premarket
Approval application mentioned earlier. Avita is now using the BARDA funds to
strengthen its supply chain and quality systems in advance of a U.S. launch. BARDA
is a U.S. federal agency within the Office of the Assistant Secretary for Preparedness
and Response in the U.S. Department of Health and Human Services. BARDAs
mission is to ensure the United States is well prepared for public health
emergencies, thus one of its core aims is to develop medical countermeasures to
mitigate the medical consequences from potential chemical, biological, radiation
and nuclear threats. BARDA has the option of spending an additional $34 million for
procurement and post-market entry support.
U.S. Military Also Evaluating ReCell In October, 2015 doctors at the Walter Reed
National Military Medical Center started a trial to investigate if ReCell combined
with widened split-thickness skin grafts is more effective in treating full-thickness
traumatic wounds than conventional skin grafts. Management believes that ReCell
Avita Medical Ltd. Page 5 of 25
Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

is ideally suited for a military field hospital environment because it is fully portable,
battery-powered, and can be stored at ambient temperatures. The randomized,
within-patient controlled trial feasibility study is investigator-led and plans to
recruit up to 20 patients.
Divestiture Of Non-Core Respiratory Business Another Source Of Funds In
February, 2016 Avita completed the sale of its Respiratory business for $2.5 million.
This non-core business included two products, Breath-A-Tech and the Funhaler,
which are designed to optimize the use of inhalers for asthma therapy. Avita
received $2.0 million in cash, plus 117,894 new shares in Medical Developments
International Limited (ASX: MVP), the buyer of the business.

MARKET OVERVIEW BURN TREATMENT


The primary target market for ReCell is burn treatment. The skin is the largest
organ of the human body, with approximately 18 square feet of surface area. The
skin's primary function is to serve as a protective barrier against infectious agents
and the harmful effects of ultraviolet radiation from the sun, in addition to
regulating body temperature, gathering sensory information, and assisting the
immune system. There are two major layers of skin, an outer layer called the
epidermis and an inner layer called the dermis. The epidermis has several strata
that contain four cell types. Keratinocytes produce keratin, a protein that gives skin
its strength and flexibility and waterproofs the skin surface. Melanocytes produce
melanin, the dark pigment that gives skin its color. Merkel cells (a/k/a tactile cells)
are skin cells associated with light touch discrimination. Langerhans cells are found
in the skin and mucosa and are part of the immune system. Langerhans cells are a
type of dendritic cell, which serve as sentries for the bodys immune system by
detecting pathogens and instructing the other parts of the immune system how to
mount a response.
Figure 4: Skin Has Two Major Layers, the Epidermis and the Dermis. It Is the
Largest Organ of The Human Body

Source: National Institutes of Health


Burns are caused by acute trauma injury to the skin or other tissue from thermal,
radiation, chemical, or electrical contact. At temperatures greater than 44 degrees
Celsius (111 degrees Fahrenheit) proteins break down and lose their structure
(a/k/a denaturation) a process that leads to cell death (a/k/a coagulative necrosis).
Burns are classified by the depth (superficial, partial-thickness, full-thickness,
subdermal) and the percentage of total body surface area (TBSA) affected.
According to the American Burn Association, approximately 500,000 burns are
treated annually in the United States, of which 40,000 require hospitalization.

Avita Medical Ltd. Page 6 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Burns result in more than 250,000 deaths each year worldwide according the World
Health Organization, mostly in developing countries, as the incidence of burns is
declining in developed nations.
Figure 5: Burn Classification
Burn Type Degree Description
Superficial First Degree Confined to the outer
epidermal layer
Partial Thickness Second Degree Involves the epidermal
layer and part of the
inner dermis.
Full Thickness Involves destruction of
both the epidermis and
dermis layer.
Sub Dermal Third Degree Extends to the
subcutaneous tissue
below the dermis,
including fat.
Fourth Degree Extends to muscle and
bone.
Source: American Burn Association

The depth and extent of the injury depends on the mechanism of the burn and the
duration of exposure to the heat source, which leads to distinct injury patterns that
require different management. Thus, understanding the pathophysiology of a burn
injury is important for effective management. One model for assessing a burn is
Jacksons Burn Wound Model, which specifies three zones of injury to help guide
treatment. The center of the primary injury closest to the heat is the zone of
coagulation, which is characterized by irreversible tissue necrosis (e.g. cell death).
Surrounding the zone of necrosis is the zone of stasis (a/k/a the zone of ischemia),
which is characterized by a reduction in blood circulation. This tissue is damaged
but potentially salvageable if the ischemia can be reversed. The outer area of a
burn is known as the zone of hyperemia, where the capillary vessels dilate in
response to inflammatory mediators and increase blood flow.

Figure 6: Jacksons Burn Wound Model

Source: Google Images

Avita Medical Ltd. Page 7 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Treatment - The medical response depends on the severity of the burn. Standard
treatments for burn wounds include topical antibacterial medication, regular
cleaning (a/k/a debridement), elevation, and in serious cases, skin grafting. Burns
covering more than 10% TBSA can lead to albumin loss and swelling (a/k/a edema),
which necessitates intravenous fluid treatment in order to prevent hypovolemia.
Hypovolemia (sometimes referred to as hypovoelemia or oligemia) is a decrease in
the volume of blood and plasma in the body which can potentially lead to
hypovolemic shock from the sudden and significant loss of blood or fluids.
Following treatment, patients undergo intensive rehabilitation to restore range-of-
motion. Additional complications of burns can include respiratory injury, infection,
scarring, and contractures. Contractures occur when the skin surrounding the burn
pulls together, resulting in a restriction of movement around the injured area.
Unmet Needs - Burn patients can be difficult and expensive to treat, especially in
cases where large surface areas are involved that require skin grafting, which can
lead to a lengthy stay in the hospital. These patients offer additional challenges
because it may be difficult to find enough viable donor skin on other parts of their
bodies, and the harvesting procedure creates a second wound site requiring
management. The long length of stay coupled with the risk of complications
represents the primary cost driver in the treatment of burn patients. Thus, new
products with the ability to accelerate healing can add value by improving patient
outcomes and lowering the total cost of treatment compared to existing methods.

Avita Medical Ltd. Page 8 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

PRODUCT OVERVIEW
ReCell - The ReCell device creates a Regenerative Epithelial Suspension (RES) from a
small biopsy of the patients skin and can be administered in conjunction with
conventional treatments for burns and reconstructive procedures. RES can
promote earlier wound closure with less donor skin from the patient, thus
shortening the length of stay in the hospital and reducing the need for
reconstructive procedures and scar management afterwards. In addition, the
regenerated skin produces a superior cosmetic result compared with meshed
autograft alone and exhibits more normal collagen formation. The product is
especially useful in the treatment of deep burns with high TBSA involvement where
there is limited donor skin available, addressing an area of unmet need for
hospitals.
Figure 7: The ReCell System

Source: Avita Medical


How It Works ReCell is a novel autologous cell harvesting system for epidermal
replacement and does not require the use of laboratory facilities for cell culturing.
The processing unit includes a sterile tray for mechanical disaggregation of the skin
sample, processing chambers, a proprietary enzyme formulation, and a validated
set of applicators designed to overlay the wound area with a suspension of healthy
cells. The process takes approximately 30 minutes to create a Regenerative
Epithelial Suspension (RES) composed of activated, autologous skin cells
(keratinocytes, fibroblasts, melanocytes) and signaling factors (cytokines, growth
factors, and chaperone proteins like heat-shock protein 90 (hsp90)) that promote
healing. Unlike sheet products, the disaggregated cells in RES present more edges
which create a free edge effect amplifying the signal to activate growth factors like
EGFR, a potent inducer of cell motility. The free edge keratinocytes and
fibroblasts rapidly secrete growth factors and cytokines to orchestrate proliferation,
migration, angiogenesis, and the matrix re-modelling processes that promote skin
regeneration across the entire wound. ReCell is simple and easy to use, and
medical professionals can learn how to use product in about 1 hour.
Finally, because RES contains multiple phenotypes of skin cells, it offers complete
restoration of normal skin functionality (e.g. durability, pigmentation, minimal
contracture). For example, the melanocytes contained in RES survive to localize to
the epidermal side of the dermal-epidermal junction and evenly distribute melanin
throughout the epidermis resulting in normal pigmentation of the new skin. Thus,

Avita Medical Ltd. Page 9 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

RES can promote earlier wound closure with less donor skin from the patient,
shorten the length of stay in the hospital and produce a superior cosmetic result
with less need for reconstructive procedures and scar management afterwards.

Figure 8: The Cells and Signaling Factors in Regenerative Epithelial Suspension


(RES) Promote Healing

Source: Avita Medical

A Compelling Value Proposition -- Both clinical and health economic data


demonstrate the superiority of ReCell over the current standard of care. Hospital
length of stay (LOS) is the primary cost driver for burn patients, with higher TBSA
driving longer LOS. In one study, patients with ReCell surgery were likely to have a
shorter length of stay compared to patients with split skin grafting (SSG) surgery
alone, with 42% cost savings for patients with 20% TBSA.
Figure 9: ReCell Offers Hospitals A Compelling Value Proposition, Especially For
The Most Serious Cases

60000 42% 45%


% Savings Achieved with Recell

40%
50000 34%
32% 35%
Cost of Treatment ()

30%
40000 30%
25%
25%
30000
20%
20000 15%
10%
10000
5%
0 0%
2 5 10 15 20
Total Body Surface Area (%)

% savings achieved with ReCell SOC RC

Source: Avita Medical

Avita Medical Ltd. Page 10 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Interestingly, shortening the acute surgery duration with ReCell independently


predicts the length of stay in the burn center. Another study found ReCell saved
29% in analgesic and dressing costs compared to conventional delayed surgery for
non-healing wounds. In our opinion, faster wound healing, reduced donor site
morbidity and better functional and aesthetic scar outcomes make ReCell a
preferred choice among patients and doctors alike.
Clinical Data Early product approvals were based on data from case series studies
which generated more than 60 presentations and publications. In order to gain U.S.
regulatory approval, however, the company needs to conduct a randomized,
controlled clinical trial to support a PMA application to the FDA. The CPT001-6 trial
is designed to evaluate the safety and effectiveness of ReCell in combination with
meshed skin autograft for treatment of acute burn injuries that require skin grafts
(mixed depth, second or third degree) compared to a control group of autograft
alone. Additional patient selection criteria include 5-50% TBSA involvement with a
treatment area of 300+cm2/area. This 30-patient trial completed treatment in
April, 2016.
Figure 10: CPT001-6 Clinical Trial Endpoints
Endpoint Notes
Co-Primary
Expansion ratio (donor:treatment Superiority of ReCell/Mesh combo
area) at time of treatment. versus graft alone as measured by a
ReCell expansion ratio: control
expansion > 1.
Incidence of complete closure rate of Non-inferiority of ReCell/Mesh combo
recipient site at 8 weeks (with versus graft alone
additional procedures aiding wound
closure allowed within initial 8 weeks)

Secondary
Week 24 Subject preference
Blinded Observer scar rating
Patient scar rating
Source: https://clinicaltrials.gov/ct2/show/NCT02380612
Regulatory -- ReCell holds CE Mark in the European Union, is TGA registered in
Australia, and SFDA cleared in China. The company is pursuing U.S. regulatory
approval and plans to submit a PMA to the FDA in late Q1 or early Q2 2017 with
FDA approval anticipated in Q1 2018. The FDA has granted ReCell Expedited Access
Pathway (EAP) designation, which provides a high degree of confidence in the
anticipated approval date and allows for the possibility of an earlier-than-expected
approval. Another vote of confidence came in October, 2015 when the FDA said it
would allow continued access to ReCell during the regulatory review process,
allowing US burn surgeons participating in Avita Medicals regulatory trial to treat
up to 60 new patients. The company also has a compassionate use amendment to
the FDA IDE, which allows up to 48 patients with insufficient healthy skin for a skin
graft to be treated with ReCell in cases where the physician believes that there is no
suitable treatment alternative, typically when the patient lacks sufficient donor skin
to be successfully grafted.

Avita Medical Ltd. Page 11 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Reimbursement Avita is seeking formal reimbursement for ReCell in the United


Kingdom, Germany, Turkey, Australia, France and Italy. In the United Kingdom,
Avita cleared the first hurdle to more widespread use by gaining support from the
National Institute for Health and Care Excellence (NICE), whose role is to provide
national guidance and advice to improve healthcare. In November, 2014 the NICE
Medical Technologies Advisory Committee said the ReCell system showed promise,
but would require additional evidence on its use in clinical practice to enable a
recommendation for routine use in the NHS. A clinical trial to provide additional
data is currently underway, and NICE is planning to commence a review of its earlier
guidance in November 2017.
Figure 11: ReCell Product Milestones
Cal Yr Qtr Milestone/Catalyst

2016 Q1 1/16 Completed enrollment in pivotal study (Q3 F2016)


1/16 New distributor for Japan & S. Korea (Q3 F2016)

Q2 4/16 treated last patient in pivotal study (Q4 F2016)

Q3

Q4

2017 Q1 Health Economics Study results (Q3 F2017)

Q2 Complete study report, submit PMA to FDA (Q4 F2017)

Q3 Possible FDA review panel

Q4

2018 Q1 Possible FDA approval of ReCell for burns (Q3 F2018)

Q2 BARDA stocking order expected (Q4 F2018)

Q3

Q4

Source: Company reports and Lake Street Capital Markets


In the United States, management plans to seek additional reimbursement
following FDA approval. The cost of the device can be paid for under current
inpatient codes, which allows hospitals to justify use of the product simply based on
the cost savings and quality improvement. Longer term, the company plans to seek
expanded reimbursement for physicians and outpatient points of service. Inclusion
in clinical practice guidelines can be an important factor in discussions with payors
since it increases the likelihood that the company can eventually obtain dedicated
commercial reimbursement for the product. ReCell made important progress in
September, 2016 when the International Society of Burn Injuries (ISBI) leadership
formally released comprehensive Practice Guidelines for Burn Care during its
biennial meeting, noting that autologous epithelial cells in suspension have been
shown to have significant potential for enhanced healing of a variety of burn
wounds.
Addressable Market Analysis & Commercialization Strategy Avita estimates
ReCell is applicable to 3.1 million burns worldwide, most of which are in China. The
primary target markets for the company continue to be the roughly 80,000 burns in
Europe and North America, where Avita continues to expand their sales and

Avita Medical Ltd. Page 12 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

distribution capabilities. In November 2015, the company entered into agreements


with specialist wound-care distributors in France and the United Kingdom. In
January, 2016 Avita added new distributors for Japan and South Korea for the
ReCell device. Distributors for Germany, Switzerland and Austria were added in
February, 2016; China in March, 2016; and Malaysia in June, 2016. Avita plans to go
direct in to the 127 burn centers in the United States, which represents a narrowly-
defined target market of 300 physicians that can be easily serviced with a small
sales force. The 15 centers already involved in the compassionate use and
continued access programs imply a rapid ramp for the product once it is approved.

OTHER PRODUCTSRENOVACELL & REGENERCELL


ReNovaCell and ReGenerCell are specially configured versions of the ReCell product
for pigmentation disorders and wound care, respectively, that received CE Mark in
January, 2016. By tailoring the amount of RES produced by each version of the
product to the clinical need, Avita is able to offer a competitive price point for each
individual market. Sales of these two products are expected to approach those of
ReCell by 2018.
ReNovaCell This product is primarily for the treatment of hypo-pigmented skin
due to vitiligo and other aesthetic applications such as old age, injury, and skin
treatments. Vitiligo is a disease that causes the loss of skin color in patches when
the cells that make skin color, (melanocytes) die or stop functioning. The extent
and rate of color loss from vitiligo is unpredictable and can affect the skin on any
part of the body. Skin repigmentation represents one of the most significant unmet
medical needs in aesthetic dermatology. Current treatment options include lotions
and light therapy, which are sometimes effective, or the surgical transfer of new
melanocytes to the target area, which is expensive and time-consuming.
ReNovaCell represents the only simplified, cost-effective solution for skin
repigmentation compared to the other treatment options. Avita pegs the
worldwide market for Vitiligo at 600,000 procedures per annum. Competing
aesthetic procedures including dermabrasion, resurfacing and facial rejuvenation
total 2.3 million worldwide.
Clinical Data A study supporting the use of ReNovaCell for the repigmentation of
segmental vitiligo/piebaldism was published in Journal of the American Academy of
Dermatology in July, 2015. The authors found 6 of 10 patients achieved better than
75% repigmentation using the Avita treatment. A second study entitled ReNovaCell
for repigmentation of hypopigmented scar was published in the Journal of the
International Society for Burn Injuries found the appearance of burn scars post
treatment were significantly better post treatment (p<0.05) as rated by both
observer and the patients.
ReGenerCell Diabetic Foot Ulcers (DFUs) and Venous Leg Ulcers (VLUs) are the
primary therapeutic targets for ReGenerCell. Diabetic foot ulcers are one of the
major complications of Diabetes mellitus, occurring in 15% of all patients with
diabetes and preceding 84% of all lower leg amputations. Diabetic foot ulcers can
be a consequence of diabetic neuropathy, another major complication of diabetes
that affects approximately 65-70% of people with the disease. Because they dont
have any feeling in their extremities, these patients may become injured more
easily and not know it. The neglect of these slow-healing injuries (ulcers) can result
in infections, which can lead to the loss of a limb. The American Diabetes
Association (ADA), estimates that approximately 27 million Americans suffer from
diabetes, 7 million of whom are undiagnosed, with an additional 79 million
classified as pre-diabetic. Within the diabetic population, approximately two
million develop diabetic foot ulcers, slow-healing wounds that are brought on by

Avita Medical Ltd. Page 13 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

the reduced blood flow and nerve damage caused by diabetes. Non-healing ulcers
may become infected, and are a major cause of the 82,000 lower-extremity
amputations that take place each year. Hospitalization costs can run $20,000 for a
diabetic foot ulcer and up to $60,000 for an amputation. The market for DFU and
VLU treatment products is pegged at roughly $3 billion. Early clinical trial results
showed ReGenerCell could heal 70% of ulcers within 60 days of treatment, with a
mean duration of 18 months.
Figure 12: ReNovaCell & ReGenerCell Product Milestones
Cal Yr Qtr Milestone/Catalyst

2016 Q1 1/16 New distributor for Japan & S. Korea (Q3 F2016)
3/16 Launched expanded product line in Europe (Q3 F2016)

Q2 5/16 First patient in DFU feasibility study (Q4 F2016)

Q3

Q4 Data readout from VLU pilot study (Q2 F2017)

2017 Q1

Q2 Complete DFU feasibility trial recruitment (Q4 F2017)

Q3 Commence DFU pilot study (Q1 F2018)


Conduct VLU pre-IDE meeting with FDA

Q4 Commence VLU pivotal trials (Q2 F2018)

2018 Q1

Q2

Q3

Q4

Source: Company reports and Lake Street Capital Markets

Clinical Data Early results from the 24-patient VLU Pilot Trial show that
ReGenerCell produced statistically significant improvements in wound size, pain,
and quality of life scores, which has encouraged management to proceed to a
pivotal trial in late 2017. Wounds in the treated group closed on average by 60%
compared to 21% for the control group (p=0.01). In the sub-group of large ulcers
2
(>10cm ), which comprise the majority of VLUs, 23% attained complete closure at
14 weeks compared to 7% in the control group.

INTELLECTUAL PROPERTY
Avita has assembled a strong global patent portfolio covering its core intellectual
property, a unique cell suspension and method for its preparation that is rapid,
efficient and simple to prepare and apply. Many of the original patents are in force
until 2022 and patents for the augmented product do not expire until 2033-2034.
In November, 2015 the company received a new Australian patent
(AU2013202587) that effectively extends the original ReCell patents to 2033 in
Australia and provides greater claim coverage including conditioned
Regenerative Epithelial Suspension and the methods of preparing and using
RES for skin treatment as well as epithelia other than skin, such as cornea and

Avita Medical Ltd. Page 14 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

trachea. The new patent allows a broad range of exogenous agents to be


added to RES, including such items as heat shock protein, hyaluronic acid, and
adipose-derived stem cells.
Figure 13: Avita Has Assembled a Strong Global Patent Portfolio
Geography ID Description
U.S. Granted 9,078,741 Cell suspension preparation
technique and device
9,029,140 Cell suspension preparation
technique and device
8,946,381 Compositions and uses thereof for
the treatment of wounds
U.S. Applications 20150182739 Cell Suspension Preparation
Technique and Device
20110311497 Cell Suspension Preparation
Technique and Device
20110150848 Cell Suspension Preparation
Technique and Device
20100196334 Cell Suspension Preparation
Technique and Device
20090214622 Nanoporous Membrane and Method
of Preparation Thereof
20020106353 Cell suspension preparation
technique and device
20160024450 Systems and Methods for Tissue
Processing and Preparation of Cell
Suspension Therefrom
20150079153 Cell Suspension and Use Thereof
International HK1207662 (A1) Cell Suspension and Use Thereof
PT2343079 (E) Cell Suspension Preparation Device
JP2014193415 (A) Method for Preparing Cell
Suspension and Cell Suspension
WO2014153072 (A1) Systems and Methods for Tissue
Processing and Preparation of Cell
Suspension Therefrom
ES2367276 (T3) Tecnica de Preparacion de
Suspension Celular y Uso de la
Misma
AU3990197 (A) Method of Engraftment of Cultured
Cells
HK1057713 (A1) Cell Suspension Preparation
Technique and Use
CA2652597 (A1) Nanoporous Membrane and Method
of Preparation Thereof
Source: U.S. Patent Trademark Office, European Patent Office
In September 2015 Avita announced that one of its European patents was
validated in Austria, Belgium, France, Germany, Great Britain, Italy, the
Netherlands, Portugal, Spain, Sweden and Turkey.

Avita Medical Ltd. Page 15 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Patent EP 2343079 covers the broad use of the companys cell suspension
preparation device, ReCell and relates to a simple, rapid and cost-effective
technique for grafting cells.
In May and July 2015 Avita was granted its two U.S. patents that relate to a
simple, rapid and cost effective technique for grafting of cells, and in particular
to a device for preparing a suspension of cells from a tissue sample obtained
from a donor site and applying that suspension of cells to a recipient site.

MANAGEMENT PROFILE
Adam Kelliher, President and Chief Executive Officer - Mr. Kelliher has over 18
years of industry experience, with a track record of creating and building life
science companies like Avita. Prior to joining Avita in April 2015, Mr. Kelliher
founded Equateq Limited, a cGMP-certified manufacturer, which provided
super-pure fatty acids for the pharmaceutical, nutritional and research sectors
that was sold to BASF in 2012. He also founded Equazen Limited, which
developed omega-3 and omega-6 supplements whose lead product, eye q was
marketed in 16 countries for patients with learning conditions linked to lipid
deficiencies. In December 2007, Equazen was sold to Galencia of Switzerland.
Timothy Rooney, Chief Financial Officer - Mr. Rooney has over 25 years of
senior finance and operational management experience in the wholesale
pharmaceutical distribution and medical device industries. He joined Avita in
2012 as CFO and COO and served as interim CEO for a 16-month period from
2013 2015 before returning to his role as both CFO and COO in April 2015.
Previously, Mr. Rooney served as CFO and COO of PDI Enterprises where he
brought the wholesale pharmaceutical distribution company to the national
stage, growing revenues from $5m to $430m. Mr. Rooney has also served as
President of a clean-tech manufacturer and distributor as well as President of a
non-profit organization.
Andrew Quick, Vice President of Research & Technology - Mr. Quick joined
Avita in July of 2010 as Vice President of Research and Technology. Mr. Quicks
primary responsibilities include the implementation and conduct of Avita
Medical studies, which encompass regulatory trials underway with the U.S. FDA
as well as marketing studies outside of the U.S. Mr. Quick also oversees
Research and Development efforts related to Avitas current regenerative
medicine products along with product line expansion efforts.
Troy Barring, Chief Operating Officer -- Mr. Barring joined the company in
June, 2016 with an emphasis on regulatory, quality and supply chain functions.
He has more than 20 years of experience having held a variety of senior
leadership positions in General Management, Sales & Marketing, R&D and
Operations at Johnson & Johnson, Baxter Healthcare, North American Scientific
Medical, Boston Scientific, Orthozon Technologies, and InspiRD.
Lou Panaccio, Chairman - Mr. Panaccio has over 30 years of executive
leadership experience and has proven himself to be a successful healthcare
businessman who brings extensive experience progressing companies from
concept to commercialization. Mr. Panaccio has 15 years of board level
experience and is currently a Non-Executive director of an ASX50 Company, as
well as Sonic Healthcare Limited, one of the worlds largest medical diagnostics
companies where he has served since 2005. Previously, he spent 10 years as
the Chief Executive Officer and Executive Director for Melbourne Pathology
until 2001. Mr. Panaccio has served in executive and board roles for other

Avita Medical Ltd. Page 16 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

companies including CPW Group, Monash IVF Group and Primelife Corporation
Limited.

Avita Medical Ltd. Page 17 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

RISKS
We believe an investment in AVH involves the following risks:
Intellectual Property - The Company relies substantially on their patents and
other intellectual property for competitive differentiation. Other companies
may develop similar or superior technologies which may reduce their
competitive advantage and comparable effectiveness of the Companys
solutions. Also, if their patents are infringed upon or other companies claim
intellectual property infringement, the Company may incur significant legal
expenses that could negatively affect their financial position.
Exchange Rates - The Companys financial statements are reported in
Australian Dollars as they have operations there, but also in the United
Kingdom and North America. Appreciation of the Australian dollar against the
US dollar or British pound could adversely affect the Companys profitability
and financial position.
Competition - The Company competes with multiple other firms both in
Australia and internationally. Some of these companies have greater financial
resources, established relationships and larger sales forces among other
advantages.
Government Policy and Regulation - The markets within which the Company
operates are heavily regulated. Any changes to the policies or regulations in the
countries where the Company sells their products could have adverse effects
on the sales of current products, as well as on the development and approval
of future products.
Approval in the United States - The Companys lead product, ReCell is
patented, CE-marked for Europe, TGA-registered in Australia and CFDA-cleared
in China but is limited only to investigational use in the United States. If the
Company fails to receive approval from the FDA in the future, the prospects for
future growth may be negatively impacted.
Capital Requirements - The Company may require additional capital to finance
operations and future growth and innovation. This could potentially lead to
share dilution or an increased debt burden. Concurrently, if the Company is
unable to obtain the necessary capital, future operations and growth may be
negatively affected.

Avita Medical Ltd. Page 18 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

FINANCIAL NOTES
Revenue - We forecast revenue of AUD 8.2 million in F2017 and AUD 26.7
million in F2018. The company has a June year end. We estimate that ReCell
product sales will generate 52% of total revenue in F2016 and 67% in F2017.
Gross Margin - Avita reported 88.7% gross margins in F2016. The high gross
margins are due to BARDA payments which are booked as revenue but carry no
COGS component. Adjusted gross margin calculated only on product sales is
forecast to improve from 58.7% in F2017 to 65.6% in F2018, while reported
gross margins drop from 85.9% to 73.3% as the sales mix shifts to product
sales.
Operating Expenses - Avita is investing in its new product pipeline with clinical
studies and expanding its sales and distribution capabilities, which we estimate
could lead to an (AUD 11.3 million) operating loss in F2017 and an (AUD 0.1
million) loss in F2018. We forecast breakeven for the company in F2019.
Non-Operating Items - The company is unlikely to pay taxes for the foreseeable
future due to AUD 113.5 million in tax loss carryforwards.
Balance Sheet - The company ended the June 2016 quarter with AUD 4.2
million in cash. Since then, the company completed a rights offering in July,
2016 that added AUD 9.0 million, bringing the cash balance to approximately
AUD 7.1 million at the end of December 2016. The company may need to raise
additional capital in order to bring its products to commercialization, which is
assumed in our estimates.

Avita Medical Ltd. Page 19 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Avita Medical Ltd.


Income Statement (AUD Thousands)

2015A Dec-15A Jun-16A 2016A Dec-16E Jun-17E 2017E Dec-17E Jun-18E 2018E Dec-18E Jun-19E 2019E
Revenue AUD 1,215 AUD 1,266 AUD 2,281 AUD 3,547 AUD 3,580 AUD 4,610 AUD 8,190 AUD 6,030 AUD 20,680 AUD 26,710 AUD 15,430 AUD 21,430 AUD 36,860
Year-To-Year Growth (62.9%) 145.1% 226.6% 192.0% 182.9% 102.1% 130.9% 68.4% 348.6% 226.1% 155.9% 3.6% 38.0%
Half-To-Half Growth 81.2% 80.2% 56.9% 28.8% 30.8% 243.0% (25.4%) 38.9%

Cost Of Sales 205 209 193 402 507 644 1,151 1,010 6,113 7,123 4,334 5,395 9,728

Gross Profit 1,009 1,057 2,088 3,145 3,073 3,966 7,039 5,020 14,567 19,587 11,096 16,035 27,132
Gross Margin 83.1% 83.5% 91.5% 88.7% 85.8% 86.0% 85.9% 83.2% 70.4% 73.3% 71.9% 74.8% 73.6%

Operating Expenses 8,885 6,242 8,147 14,389 8,930 9,500 18,430 9,046 10,629 19,675 10,239 11,499 21,739

Operating Income (Loss) (7,876) (5,185) (6,059) (11,244) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
Operating Margin NM NM NM NM NM NM NM NM 19.0% NM 5.6% 21.2% 14.6%

Other Expense / (Income) 0 0 0 0 0 0 0 0 0 0 0 0 0

Income Before Taxes (7,876) (5,185) (6,059) (11,244) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
Pre-Tax Margin NM NM NM NM NM NM NM NM 19.0% NM 5.6% 21.2% 14.6%

Income Tax (Provision) Benefit (100) 0 (0) (0) 0 0 0 0 0 0 0 0 0


Tax Rate NM NM NM NM 0.0% 0.0% NM 0.0% 0.0% NM 0.0% 0.0% NM

Net Income As Reported (7,344) (4,929) (3,821) (8,750) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
EPS As Reported (0.02) (0.01) (0.01) (0.02) (0.01) (0.01) (0.02) (0.01) 0.01 (0.00) 0.00 0.01 0.01

Adjustments 199 (35) 131 96 0 0 0 0 0 0 0 0 0

Net Income (7,144) (4,964) (3,690) (8,654) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
Net Margin NM NM NM NM NM NM NM NM 19.0% NM 5.6% 21.2% 14.6%
EPS (AUD 0.02) (AUD 0.01) (AUD 0.01) (AUD 0.02) (AUD 0.01) (AUD 0.01) (AUD 0.02) (AUD 0.01) AUD 0.01 (AUD 0.00) AUD 0.00 AUD 0.01 AUD 0.01
Year-To-Year Growth NM NM NM NM NM NM NM NM NM NM NM 15.2% NM
Half-To-Half Growth NM NM NM NM NM NM (78.2%) 429.3%

IFRS Fully Diluted Shares 353,058 532,752 532,752 532,752 672,917 772,917 722,917 773,017 773,117 773,067 773,217 773,317 773,267
Adj. Fully Diluted Shares 353,058 532,752 532,752 532,752 672,917 772,917 722,917 773,017 773,117 773,067 773,217 773,317 773,267

Percent of Sales 58.7% 65.6%


Cost of Sales 16.9% 16.5% 8.5% 11.3% 14.2% 14.0% 14.1% 16.8% 29.6% 26.7% 28.1% 25.2% 26.4%
Cost of Product Sales 16.9% 33.5% 38.6% 35.8% 43.0% 40.0% 41.3% 37.0% 34.0% 34.4% 31.0% 27.0% 28.6%
Administrative Expenses 315.3% 251.2% 146.1% 183.6% 90.8% 71.6% 80.0% 55.6% 16.4% 25.3% 22.4% 16.3% 18.9%
Share Based Compensation 1.1% 0.1% 41.9% 27.0% 2.2% 2.2% 2.2% 3.5% 3.5% 2.7% 3.5% 3.5% 3.2%
Research and Development 191.9% 122.4% 83.7% 97.5% 100.6% 78.1% 87.9% 43.1% 12.6% 19.5% 11.7% 8.4% 9.8%
Sales and Marketing 223.3% 119.5% 85.5% 97.6% 55.9% 54.2% 54.9% 49.8% 19.3% 26.2% 29.2% 25.7% 27.1%

Source: Company reports and Lake Street Capital Markets estimates


[a] Includes Discontinued Operations

Avita Medical Ltd. Page 20 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Avita Medical Ltd.


Income Statement (AUD Thousands)

2015A Dec-15A Jun-16A 2016A Dec-16E Jun-17E 2017E Dec-17E Jun-18E 2018E Dec-18E Jun-19E 2019E
Revenue AUD 1,215 AUD 1,266 AUD 2,281 AUD 3,547 AUD 3,580 AUD 4,610 AUD 8,190 AUD 6,030 AUD 20,680 AUD 26,710 AUD 15,430 AUD 21,430 AUD 36,860
Year-To-Year Growth (62.9%) 145.1% 226.6% 192.0% 182.9% 102.1% 130.9% 68.4% 348.6% 226.1% 155.9% 3.6% 38.0%
Half-To-Half Growth 81.2% 80.2% 56.9% 28.8% 30.8% 243.0% (25.4%) 38.9%

Cost Of Sales 205 209 193 402 507 644 1,151 1,010 6,113 7,123 4,334 5,395 9,728

Gross Profit 1,009 1,057 2,088 3,145 3,073 3,966 7,039 5,020 14,567 19,587 11,096 16,035 27,132
Gross Margin 83.1% 83.5% 91.5% 88.7% 85.8% 86.0% 85.9% 83.2% 70.4% 73.3% 71.9% 74.8% 73.6%

Operating Expenses 8,885 6,242 8,147 14,389 8,930 9,500 18,430 9,046 10,629 19,675 10,239 11,499 21,739

Operating Income (Loss) (7,876) (5,185) (6,059) (11,244) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
Operating Margin NM NM NM NM NM NM NM NM 19.0% NM 5.6% 21.2% 14.6%

Other Expense / (Income) 0 0 0 0 0 0 0 0 0 0 0 0 0

Income Before Taxes (7,876) (5,185) (6,059) (11,244) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
Pre-Tax Margin NM NM NM NM NM NM NM NM 19.0% NM 5.6% 21.2% 14.6%

Income Tax (Provision) Benefit (100) 0 (0) (0) 0 0 0 0 0 0 0 0 0


Tax Rate NM NM NM NM 0.0% 0.0% NM 0.0% 0.0% NM 0.0% 0.0% NM

Net Income As Reported (7,344) (4,929) (3,821) (8,750) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
EPS As Reported (0.02) (0.01) (0.01) (0.02) (0.01) (0.01) (0.02) (0.01) 0.01 (0.00) 0.00 0.01 0.01

Adjustments 199 (35) 131 96 0 0 0 0 0 0 0 0 0

Net Income (7,144) (4,964) (3,690) (8,654) (5,857) (5,534) (11,391) (4,026) 3,938 (88) 857 4,536 5,393
Net Margin NM NM NM NM NM NM NM NM 19.0% NM 5.6% 21.2% 14.6%
EPS (AUD 0.02) (AUD 0.01) (AUD 0.01) (AUD 0.02) (AUD 0.01) (AUD 0.01) (AUD 0.02) (AUD 0.01) AUD 0.01 (AUD 0.00) AUD 0.00 AUD 0.01 AUD 0.01
Year-To-Year Growth NM NM NM NM NM NM NM NM NM NM NM 15.2% NM
Half-To-Half Growth NM NM NM NM NM NM (78.2%) 429.3%

IFRS Fully Diluted Shares 353,058 532,752 532,752 532,752 672,917 772,917 722,917 773,017 773,117 773,067 773,217 773,317 773,267
Adj. Fully Diluted Shares 353,058 532,752 532,752 532,752 672,917 772,917 722,917 773,017 773,117 773,067 773,217 773,317 773,267

Percent of Sales 58.7% 65.6%


Cost of Sales 16.9% 16.5% 8.5% 11.3% 14.2% 14.0% 14.1% 16.8% 29.6% 26.7% 28.1% 25.2% 26.4%
Cost of Product Sales 16.9% 33.5% 38.6% 35.8% 43.0% 40.0% 41.3% 37.0% 34.0% 34.4% 31.0% 27.0% 28.6%
Administrative Expenses 315.3% 251.2% 146.1% 183.6% 90.8% 71.6% 80.0% 55.6% 16.4% 25.3% 22.4% 16.3% 18.9%
Share Based Compensation 1.1% 0.1% 41.9% 27.0% 2.2% 2.2% 2.2% 3.5% 3.5% 2.7% 3.5% 3.5% 3.2%
Research and Development 191.9% 122.4% 83.7% 97.5% 100.6% 78.1% 87.9% 43.1% 12.6% 19.5% 11.7% 8.4% 9.8%
Sales and Marketing 223.3% 119.5% 85.5% 97.6% 55.9% 54.2% 54.9% 49.8% 19.3% 26.2% 29.2% 25.7% 27.1%
Finance Costs 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other Operating Items 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Source: Company reports and Lake Street Capital Markets estimates


[a] Includes Discontinued Operations

Avita Medical Ltd. Page 21 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Avita Medical Ltd.


Balance Sheet (AUD Thousands)

2015A Dec-15A Jun-16A 2016A Dec-16E Jun-17E 2017E Dec-17E Jun-18E 2018E Dec-18E Jun-19E 2019E
Assets
Subtotal Cash & S/T Investments AUD 2,967 AUD 7,716 AUD 4,172 AUD 4,172 AUD 7,315 AUD 21,192 AUD 21,192 AUD 16,570 AUD 12,141 AUD 12,141 AUD 14,112 AUD 13,660 AUD 13,660

Subtotal Non-Cash Current Assets 2,343 2,699 3,364 3,364 3,393 3,842 3,842 4,757 21,082 21,082 16,183 21,923 21,923

Subtotal Current Assets 5,310 10,414 7,536 7,536 10,708 25,034 25,034 21,327 33,223 33,223 30,295 35,583 35,583

Subtotal L/T Assets 133 106 94 94 128 167 167 218 478 478 669 941 941

Total Assets 5,443 10,521 7,631 7,631 10,836 25,201 25,201 21,545 33,701 33,701 30,964 36,524 36,524

Liabilities
Current Liabilities 1,226 1,852 1,750 1,750 1,833 1,762 1,762 2,171 10,440 10,440 6,886 7,960 7,960
Trade and Other Payables 1,048 1,577 1,542 1,542 1,691 1,610 1,610 2,020 10,189 10,189 6,667 7,707 7,707
Provisions 179 171 208 208 142 152 152 151 251 251 219 253 253
Liabilities included in disposal group classified as
0 held for sale105 0 0 0 0 0 0 0

Subtotal L/T Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0

S/E 4,217 8,668 5,880 5,880 9,003 23,439 23,439 19,374 23,261 23,261 24,078 28,564 28,564
Total Liabilities and Stockholders Equity 5,443 10,521 7,631 7,631 10,836 25,201 25,201 21,545 33,701 33,701 30,964 36,524 36,524

Balance Sheet Analysis


ROIC (Trailing 12 Months) NM NM NM NM NM NM NM NM NM NM 119.7% 33.9% 33.9%
ROE (Trailing 12 Months) NM NM NM NM NM NM NM NM NM NM 20.3% 20.5% 20.5%
ROA (@ Effective Tax Rate) NM NM NM NM NM NM NM NM NM NM 15% 16% 16.0%
Cash per Share $0.01 $0.01 $0.01 $0.01 $0.01 $0.03 $0.03 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02
Net Cash / (Liability) 2,967 7,716 4,172 4,172 7,315 21,192 21,192 16,570 12,141 12,141 14,112 13,660 13,660
Net Cash/Share $0.01 $0.01 $0.01 $0.01 $0.01 $0.03 $0.03 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02
Current Ratio 4.3x 5.6x 4.3x 4.3x 5.8x 14.2x 14.2x 9.8x 3.2x 3.2x 4.4x 4.5x 4.5x
Working Capital (Excl. Cash) 1,117 846 1,614 1,614 1,560 2,080 2,080 2,586 10,642 10,642 9,297 13,963 13,963
Chg in WC (622) (271) 768 497 (54) 520 466 506 8,056 8,562 (1,346) 4,667 3,321
WC as % TTM Sales 91.9% 43.1% 45.5% 45.5% 26.6% 25.4% 25.4% 24.3% 39.8% 39.8% 25.7% 37.9% 37.9%
Total Debt / Total Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Book Value per Share $0.01 $0.01 $0.01 $0.01 $0.01 $0.03 $0.03 $0.03 $0.03 $0.03 $0.03 $0.04 $0.04
Price/Book 8.1x 8.3x 8.6x 8.6x 7.7x 4.1x 4.1x 5.2x 6.6x 6.6x 8.0x 6.8x 6.8x
Tang. Book Value per Share $0.01 $0.02 $0.01 $0.01 $0.01 $0.03 $0.03 $0.03 $0.03 $0.03 $0.03 $0.04 $0.04

Source: Company reports and Lake Street Capital Markets estimates

Avita Medical Ltd. Page 22 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Avita Medical Ltd.


Statement Of Cash Flows (AUD Thousands)

2015A Dec-15A Jun-16A 2016A Dec-16E Jun-17E 2017E Dec-17E Jun-18E 2018E Dec-18E Jun-19E 2019E
Net Income (AUD 5,857) (AUD 5,534) (AUD 11,391) (AUD 4,026) AUD 3,938 (AUD 88) AUD 857 AUD 4,536 AUD 5,393

Receipts from Customers 3,001 707 373 1,080 0 0 0


Payments to Suppliers (10,977) (7,159) (7,736) (14,894) 0 0 0
Tax Refund Received 1,517 0 0 0 0 0 0
Interest and O/I Received 51 1,347 1,080 2,427 0 0 0
Net Cash Used in Disc. Ops. 0 442 206 648 0 0 0
Dec./(Incr.) in receivables 0 (131) (430) (561) (519) (11,895) (12,414) 3,120 (4,680) (1,560)
Dec./(Incr.) in prepayments 0 0 0 0 0 0 0 0 0 0
Dec./(Incr.) in inventories 0 102 (20) 83 (396) (4,430) (4,825) 1,779 (1,061) 719
Dec./(Incr.) in other assets 0 0 0 0
(Decrease)/Increase payables 0 149 (81) 68 410 8,168 8,579 (3,521) 1,039 (2,482)
(Decrease)/Increase in OCLs 0 (67) 11 (56) (1) 100 99 (33) 35 2
Other 771 771 0 0 0
Net Cash From Operations (6,408) (4,662) (3,276) (7,939) (5,804) (6,054) (11,858) (4,532) (4,118) (8,650) 2,202 (131) 2,072

Payments for PP&E (39) (3) (45) (48) (54) (69) (123) (90) (310) (401) (231) (321) (553)
Gain on Sale of Fixed Assets 0 0 0 0 0 0
Other 0 0 0 0
Net Cash From Investing (38) (3) (45) (48) (54) (69) (123) (90) (310) (401) (231) (321) (553)

Proceeds from sale of stock 6,178 10,026 0 10,026 9000 20,000 29,000 0 0
Capital Raising Expemses (575) (611) (54) (665) 0 0 0
Other 0 0 0 0
Net Cash From Financing 5,602 9,415 (54) 9,361 9,000 20,000 29,000 0 0 0 0 0 0
FX 162 0 (169) (169) 0 0 0 0 0 0 0 0 0
Change In Net Cash (681) 4,749 (3,544) 1,205 3,143 13,877 17,019 (4,622) (4,429) (9,051) 1,971 (452) 1,519

Cash And Equivalents, Start 3,648 2,967 7,716 2,967 4,172 7,315 4,172 21,192 16,570 21,192 12,141 14,112 12,141
Cash And Equivalents, End 2,967 7,716 4,172 4,172 7,315 21,192 21,192 16,570 12,141 12,141 14,112 13,660 13,660

Source: Company reports and Lake Street Capital Markets estimates

Avita Medical Ltd. Page 23 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

Avita Medical Ltd.


Revenue Summary (Thousands)

2015A Dec-15A Jun-16A 2016A Dec-16E Jun-17E 2017E Dec-17A Jun-18E 2018E Dec-18E Jun-19E 2019E
By Surgical Line
Total AUD 1,215 AUD 1,266 AUD 2,281 AUD 3,547 AUD 3,580 AUD 4,610 AUD 8,190 AUD 6,030 AUD 20,680 AUD 26,710 AUD 35,430 AUD 41,430 AUD 76,860
ReCell 986 573 429 1,002 490 690 1,180 1,090 12,840 13,930 24,840 26,840 51,680
ReNovaCell 0 0 0 0 450 650 1,100 1,050 2,800 3,850 4,800 6,800 11,600
ReGenerCell 0 0 0 0 190 220 410 590 2,340 2,930 4,340 6,340 10,680
BARDA 0 643 1,781 2,424 2,400 3,000 5,400 3,300 2,700 6,000 1,450 1,450 2,900
Other 229 50 71 120 50 50 100 0 0 0 0 0 0

Year/Year Growth
Total (62.9%) 145.1% 226.6% 192.0% 182.9% 102.1% 130.9% 68.4% 348.6% 226.1% 487.6% 100.3% 187.8%
ReCell (63.3%) 16.9% (13.4%) 1.7% (14.4%) 60.7% 17.8% 122.4% 1760.9% 1080.5% 2178.9% 109.0% 271.0%
ReNovaCell NM NM NM NM NM NM NM 133.3% 330.8% 250.0% 357.1% 142.9% 201.3%
ReGenerCell NM NM NM NM NM NM NM 210.5% 963.6% 614.6% 635.6% 170.9% 264.5%
BARDA NM NM NM NM NM 273.0% 68.5% 122.7% 37.5% (10.0%) 11.1% (56.1%) (46.3%) (51.7%)
Other (61.5%) 87.5% (65.1%) (47.5%) 1.0% (29.2%) (16.8%) NM NM NM NM NM NM

Qtr/Qtr Growth
Total 81.2% 80.2% 56.9% 28.8% 30.8% 243.0% 71.3% 16.9%
ReCell 15.5% (25.0%) 14.1% 40.8% 58.0% 1078.0% 93.5% 8.1%
ReNovaCell NM NM NM 44.4% 61.5% 166.7% 71.4% 41.7%
ReGenerCell NM NM NM 15.8% 168.2% 296.6% 85.5% 46.1%
BARDA NM 176.8% 34.8% 25.0% 10.0% (18.2%) (46.3%) 0.0%
Other (75.6%) 42.6% (29.2%) 0.0% NM NM NM NM

Percent of Sales
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
ReCell 81.1% 45.2% 18.8% 28.3% 13.7% 15.0% 14.4% 18.1% 62.1% 52.2% 70.1% 64.8% 67.2%
ReNovaCell NM NM NM NM 12.6% 14.1% 13.4% 17.4% 13.5% 14.4% 13.5% 16.4% 15.1%
ReGenerCell NM NM NM NM 5.3% 4.8% 5.0% 9.8% 11.3% 11.0% 12.2% 15.3% 13.9%
BARDA NM 50.8% 78.1% 68.4% 67.0% 65.1% 65.9% 54.7% 13.1% 22.5% 4.1% 3.5% 3.8%
Other 18.9% 3.9% 3.1% 3.4% 1.4% 1.1% 1.2% NM NM NM NM NM NM

Sources of Growth Y/Y


Total (2,063) 749 1,583 2,332 2,314 2,329 4,643 2,450 16,070 18,520 29,400 20,750 50,150
ReCell (1,697) 83 (66) 16 (83) 261 178 600 12,150 12,750 23,750 14,000 37,750
ReNovaCell 0 0 0 0 450 650 1,100 600 2,150 2,750 3,750 4,000 7,750
ReGenerCell 0 0 0 0 190 220 410 400 2,120 2,520 3,750 4,000 7,750
BARDA 0 643 1,781 2,424 1,757 1,219 2,976 900 (300) 600 (1,850) (1,250) (3,100)
Other (366) 23 (132) (109) 0 (21) (20) (50) (50) (100) 0 0 0

Source: Company reports and Lake Street Capital Markets estimates


[a] Includes Discontinued Operations

Avita Medical Ltd. Page 24 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com
January 30, 2017

IMPORTANT DISCLOSURES
Initiation: August 22, 2016 Rating: BUY - Price Target: AUD 0.25

Source: Yahoo! Finance

RATINGS DEFINITION
BUY rated stocks are expected to generate greater than 10% returns during the next 12 months. HOLD rated stocks are expected
to generate returns of 0% to 10% during the next 12 months. SELL rated stocks are expected to generate negative returns over
the next 12 months and generally do not have a price target.
Information on our valuation methodology and risks can be found in the Investment Thesis & Valuation and Risks
sections above.
RATINGS DISTRIBUTION

RESEARCH DISCLOSURES Lake Street Capital Markets, or its affiliates, intends to seek or expects to receive compensation for
investment banking services from the subject issuer in the next three months. In the past twelve months, the subject company
was a client of Lake Street Capital Markets, or its affiliates, and received investment banking services. During the past twelve
months, Lake Street Capital Markets received investment banking compensation from the subject company.
The authoring analysts who are responsible for the preparation of this investment research are eligible for compensation based
on the total revenue and general profitability of Lake Street Capital Markets, which includes investment banking revenue.
However, such authoring analyst will not receive compensation that is directly based on or linked to specific investment banking
transactions.
ANALYST CERTIFICATION REGULATION AC
Each authoring analyst of Lake Street Capital Markets whose name appears on the front page of this investment research hereby
certifies that (1) the recommendations and opinions expressed in this investment research accurately reflect the authoring
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and (2) no part of the authoring analysts compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed by the authoring analysts.
OTHER DISCLOSURES
This investment research is intended for informational purposes only and does not constitute an offer or solicitation to buy or
sell securities referenced herein in any jurisdiction where such would be prohibited. Although the information and statements of
fact contained in this investment research has been obtained from sources we believe to be reliable, including statistical services
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Member FINRA / SIPC. This report may not be reproduced, distributed, or published without the prior consent of Lake Street
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Avita Medical Ltd. Page 25 of 25


Institutional Equity Research Bruce D. Jackson | 612-326-9536 | bruce.jackson@lakestreetcm.com