AVITA Medical's recent Q1 2024 earnings call [1] left investors with more questions than answers. The company, known for its innovative RECELL spray-on skin technology, reported disappointing revenue figures, marking the first time under current CEO James Corbett's leadership that sequential quarterly growth wasn't achieved. While explanations were offered – a sluggish Value Analysis Committee (VAC) approval process for the expanded full-thickness skin defect indication and a surprising dip in burn wound admissions – a deeper dive into the transcript reveals a potentially more significant, and largely unnoticed, shift in AVITA's business strategy.

The company's language around the upcoming launch of RECELL GO, a semi-automated version of the RECELL system, suggests a transition towards a classic "razor-and-blade" model, potentially impacting future revenue streams and profitability. This strategy, popularized by companies like Gillette, involves selling a durable base unit (the razor) at a low cost or even a loss, while generating recurring revenue through the sale of necessary consumables (the blades).

While AVITA hasn't explicitly labeled RECELL GO as a razor-and-blade play, several key statements from CEO Corbett hint at this approach:

- "RECELL GO, the durable, will not actually create a sales dollar by itself..." This confirms the durable base unit won't be the primary revenue driver.

- "... the disposable cassette that goes with it... will replace the RECELL kit." This establishes the consumable cassette as the ongoing revenue source.

- "Since we're not billing them for or charging them for or making them make a cost commitment to the durable, we believe that we're going to make it very easy for them to adopt." This suggests the durable unit will be offered at a low cost or potentially even provided for free, mirroring the "razor" in the model.

This potential shift has significant implications. On the positive side, a razor-and-blade model could lead to faster adoption of RECELL GO, particularly among burn centers. Corbett highlighted the system's ability to significantly reduce OR time and manpower requirements, attractive features that could drive rapid uptake, especially when coupled with a low upfront cost for the durable unit.

Further supporting this hypothesis is the current RECELL kit pricing, averaging around $8,000 per kit. If AVITA were to price the RECELL GO cassette similarly, even with a significantly reduced price or free durable unit, they could maintain similar revenue per procedure. With the anticipated increase in adoption driven by RECELL GO's ease of use and reduced training requirements, overall revenue could see a substantial boost, particularly within the burn market.

However, there are also potential downsides. The razor-and-blade model relies heavily on sustained use of the base unit to drive ongoing consumable sales. If adoption of RECELL GO doesn't meet expectations or if competitive alternatives emerge, AVITA could find itself burdened with a low-margin durable unit and insufficient consumable sales to offset the initial investment.

Furthermore, the shift to a razor-and-blade model could introduce greater complexity in revenue recognition and forecasting. While the current model relies on direct sales of RECELL kits, the new model would involve a mix of low-margin durable unit sales and potentially higher-margin recurring consumable revenue. This complexity could make predicting future revenue streams more challenging, particularly in the initial stages of the RECELL GO launch.

RECELL Revenue Breakdown by Quarter

The following chart shows AVITA's commercial revenue by quarter, highlighting the recent slowdown in growth [1].

AVITA's foray into the wound care market with PermeaDerm also adds a layer of intrigue. While the company emphasizes the product's compatibility with RECELL and its ability to address the full spectrum of wound care needs, it's noteworthy that PermeaDerm is being distributed through a partnership with Stedical Medical, with AVITA receiving a 50% gross margin. This margin is significantly lower than the 85% gross margin on RECELL products, potentially impacting overall profitability.

While PermeaDerm's revenue contribution is currently negligible, AVITA expects this to increase as the sales team gains experience and the product gains traction. The company's future plans to add wound bed preparation and dermal replacement products to its portfolio suggest a continued reliance on partnerships, potentially diluting overall gross margins.

Key Financials for AVITA (USD)

Reference: [1], [2]

The implications of this strategic shift are significant and warrant close attention from investors. While the razor-and-blade model holds the promise of faster adoption and increased revenue, it also carries risks.

Investors should carefully monitor AVITA's progress in achieving widespread RECELL GO adoption, particularly within the burn market, as well as the company's ability to manage the transition to this new business model while maintaining profitability amidst a growing portfolio of potentially lower-margin wound care products.

"Fun Fact: The concept of the "razor-and-blade" model is attributed to King Camp Gillette, the founder of the Gillette Safety Razor Company. He revolutionized the shaving industry in the early 20th century by offering razors at a low cost and making his real profits from the sale of disposable blades."