Melbourne hospitals reported a surge in burns at the peak of pandemic restrictions last year. More people cooking at home, often intoxicated, were burnt by hot oil and barbeques.
At one point, doctors feared people who burnt themselves while cooking would clog up intensive-care beds needed for gravely ill Coronavirus patients.
Globally, it was a different story. Less manufacturing and travel during COVID reduced the incidence of burns, most of which occur in developing nations.
Weaker demand for burns treatment has doused the market’s interest in Australia’s regenerative-medicine stars. AVITA Medical, Polynovo and Aroa Biosurgery are well off their 52-week highs.
That’s an opportunity for long-term investors to position for a recovery in the global burns market as COVID-19 eventually subsides and pandemic restrictions ease.
Burns are big business. The global burns-care market is expected to reach US$3.7 billion by 2028, from US$2.1 billion in 2020, according to a recent report by Grand View Research.
Approximately 96% of fatal fire-related burns occur in low- to middle-income countries, says the World Health Organisation (WHO). An estimated 1 million people in India each year are moderately or severely burnt. In Bangladesh, nearly 173,000 children are burnt each year.
Sadly, more people in developing nations will be burnt in coming years. Faster industrialisation, expanding populations and lower safety standards are a recipe for burns. Then there’s climate change and its potential to cause fires and burns.
In western countries, spending on burns care is rising, partly due to increases in treatment options. Demand for biologics – targeted burns treatment based on cutting-edge science – is rising and providing an option in some cases over traditional skin grafts.
So, too, is demand for waterproof foam dressings that are used on heavily exuding wounds and have advantages over normal dressings that must be changed regularly.
Investing in burns-treatment companies has financial and social benefits. Australian regenerative-medicine companies, such as AVITA, should be good long-term investments because the burns-care market is large, growing and disrupted by new technologies.
Social benefits come from supporting companies that help burns victims. About 265,000 people worldwide die each year from burns, according to the WHO. Many more survivors are left with severe burns injuries, necessitating innovation in burns treatment. The more that can be done to help them recover from burns, the better.
Here are 3 ASX-listed burns-care stocks to consider:
1. AVITA Medial (AVH)
AVITA uses the regenerative properties of a patient’s skin to treat burns injuries, trauma injuries, chronic wounds and dermatological conditions. In September 2018, the US Food and Drug Administration approved AVITA’s RECELL system.
RECELL isolates and delivers patient-derived skin cells to treat burns and rejuvenate burnt skin. Simply, a small skin graft is taken, treated in a heated enzyme solution, turned into a spray-on-skin solution, and administered to the wound.
A one-square-centimetre sample of healthy skin can be used to heal a burn wound of up to 80-square centimetres, says AVITA. That has advantages over traditional skin grafts that require a lot more skin and cause higher rates of illness and pain for patients.
RECELL’s process also means fewer surgical procedures than traditional skins grafts (particularly with acute burns) and shorter and cheaper hospital stays. Everything I’ve read on the technology suggests it is a breakthrough approach to treating burns.
AVITA shares soared from $1.54 in late 2018 to a 52-week high of $17.30 in February 2020. Product approval and expected demand for its product put a rocket under the shares.
As often happens with biotech discoveries, the market got far too ahead of itself. AVITA more than halved to $6.80 at the peak of the share market sell off in March 2020. For most of last year, AVITA drifted lower, hitting $4.55. The stock has risen to $7.06, but is a long way off its high.
RECELL had flat revenue in the second quarter due to slightly lower burns procedures in the US. The market factored surging revenue growth into AVITA’s peak valuation, so expectations of slower revenue growth crushed the stock.
AVITA has many challenges ahead as the pandemic weighs on demand for burns treatments. But the underlying story remains: the well-run and governed company has exceptional technology and clear advantages over traditional skin grafts that require extensive skin harvesting that can cause scarring.
RECELL has a good chance of becoming the standard care for burns wounds. Morningstar expects RECELL to achieve 45% market share in adult burns treatment in the US (from 22% now) and a fifth of the paediatric burns market (after product approval).
AVITA’s longer-term potential has two planks. First, its technology platform could be applied to a range of skin-restoration conditions beyond burns. For example, in trauma, vitiligo (where skin loses pigment cells), wound scars, infectious disease and some cancer treatments.
Second, AVITA will expand to more markets as other countries approve its technology. For now, the market is mostly focused on AVITA in the US, even though RECELL would have wide application in developing nations that have a higher incidence of burns.
AVITA has no debt, US$60 million in cash on its balance sheet and should be marginally profitable by 2023. Morningstar’s fair value for AVITA at $17.40 compares to the current $7.06.
I’m not as bullish as Morningstar. Short-term revenue catalysts for AVITA are hard to find as COVID-19 ravages the US.
But there’s a large enough margin of safety to buy AVITA at the current price, provided investors have at least a three-to-five-year horizon and understand the risks of investing in loss-making biotech companies – even those with technology as strong as RECELL.
Chart 1: Avita
Source: ASX
2. Polynovo (PNV)
Polynovo was originally a CSIRO spin-off. The company reinvented itself a few years ago with a new product, NovoSorb, which can be used to treat medical problems, such as severe burns, and improve the healing process.
NovoSorb, a biodegradable synthetic polymer, helps the body use its own regenerative mechanisms to repair damaged tissue. The company’s first commercial product was a foam-like sheet (biodegradable temporating matrix) to treat severe burns or wounds.
Previously, doctors mostly used animal-sourced biological scaffolds as skin grafts rather than synthetic ones (when a dermal layer of skin was lost). However, almost a third of animal-sourced scaffolds were reportedly lost due to infections.
Like AVITA, Polynovo has been a market darling. Polynovo raced to almost $4 late last year and was among the market’s most-tipped small-cap stocks.
But the shares now trade at $2.61 after a subdued first-half trading update. Revenue growth in the second quarter slowed as US hospital capacity was filled by COVID cases.
To compound matters, Polynovo copped an ASX Query (a “please explain”) in January about timely market disclosure of its sales results for most of first-half FY20. Polynovo said its disclosure approach was consistent with market guidance.
Polynovo has plenty of near-term challenges, but has fallen 40% from its 52-week high and mostly traded sideways for the past two months. True believers will hold their Polynovo shares; prospective investors might watch and wait for better value.
Chart 2: Polynovo
Source: ASX
3. Aroa Biosurgery (ARX)
The New Zealand-based biotech is one to watch. Aroa floated on ASX in July 2020 after seeking $30 million at 75 cents a share. After soaring to $1.60 post listing, Aroa trades at $1.25.
Aroa develops, makes and sells regenerative soft-tissue substitutes for medical conditions where impaired healing leads to serious consequences for patients.
Its Endoform technology effectively provides a “short-cut” to growing new tissue and an associated blood supply, supporting recovery from injury or surgery.
Aroa says its technology offers regenerative-tissue performance at lower cost than other biologic solutions, enabling more patients access to the benefits of regenerative healing. The technology is targeted at chronic wounds and burns, hernia repair, abdominal-wall reconstruction and breast reconstruction.
Some good biotech judges I know have a high opinion of Aroa’s technology in skin substitutes. Aroa supporters believe it could become another Polynovo in time and that the stock is a cheaper entry point into the emerging synthetic-skin-substitute market.
After reading Aroa’s prospectus, I like the look of its technology and potential to expand into India and other developing nations that need low-cost wound-care solutions.
Aroa suits experienced speculators who understand the features, benefits and higher risks of investing in emerging biotech companies. Longer-term portfolio investors who want exposure to the burns-care market should stick with the larger and more-established AVITA.
Chart 3: Aroa
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 10 February 2021.
