AVITA Medical Inc

NASDAQ:RCEL

Earnings Call Analysis

Sustained Revenue Growth and Strategic Focus

The company has maintained a strong commercial revenue growth trajectory since Q1 of 2023, showcasing impressive rates of 40%, 42%, 51%, and a significant 50% increase in Q4 compared to the same quarters of the previous year.

Improved Gross Profit Margins

The company's strategy to increase production and sales has paid off, with gross profit margins climbing to 87.3% in the quarter, up from 86% in the same period of 2022. This improvement is due in part to the company's ability to leverage fixed costs, which make up about 50% of the cost of goods sold, emblematic of the efficient use of their Ventura facility.

Rising Operating Expenses

Total operating expenses saw an uptick to $24.7 million for the quarter from $15 million in the previous year. This increase reflects significant investment in growth areas such as General & Administrative (G&A) expenses, which rose by $2.4 million due to stock-based compensation and consulting, as well as Research and Development (R&D) costs which climbed by $3.4 million, largely from the TONE study and RECELL GO production insourcing. Additionally, sales and marketing expenses grew by $3.9 million following the expansion of the commercial organization in the second quarter of 2023.

Full Year Financial Highlights

For the year ending December 31, 2023, the company reported a 46% surge in commercial revenue to $49.8 million. The expansion of the commercial team and the launch of full-thickness skin defects drove this growth. Gross profit margin reached 84.5%, aligning with the upper end of the company’s full-year guidance. Annual operating expenses increased to $86.4 million from $59.1 million, attributed to the enlarged commercial team and additional investments in R&D as well as G&A.

Net Loss and Financial Position

The company recorded a net loss of $7.1 million or $0.28 per share for Q4, deepening from a net loss of $5.4 million or $0.21 per share in the prior year. For the full year, the net loss worsened to $35.4 million or $1.40 per share from $26.7 million or $1.07 per share. Despite the losses, the company's cash, cash equivalents, and marketable securities remained robust at $89.1 million as of December 31, 2023.

Upbeat Revenue Projections and Structural Reorganization

Looking ahead to Q1 of 2024, the company anticipates commercial revenues between $14.8 million and $15.6 million, marking a 42% to 50% year-over-year growth. For the full year of 2024, revenue is guided to be between $78.5 million and $84.5 million – a potential leap of 57% to 69%. Another strategic move has been to streamline the corporate structure, including winding down legacy foreign subsidiaries, which precipitated a $9.4 million noncash foreign exchange gain.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the AVITA Medical Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jessica Ekeberg, Director of Investor Relations.

[Jessica Ekeberg, executive]

Thank you, operator. Welcome to AVITA Medical's Fourth Quarter and Full Year 2023 Earnings Call. Joining me on today's call are Jim Corbett, Chief Executive Officer; and David O'Toole, Chief Financial Officer. Today's earnings release is available on our website, www.avitamedical.com under the Investor Relations section.Before we begin, let me remind you that this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements. Please review our most recent filings with the SEC, specifically the risk factors described within the Form 10-K for the year ended December 31, 2023, for additional information. Any forward-looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Jim for his comments.

[James Corbett, executive]

Thank you, Jessica. Good afternoon, and thank you for joining us today. I will begin today's call by discussing our financial and business highlights of the fourth quarter and full year 2023, followed by an update on our priorities for 2024. Following this update, I will turn the call over to David, who will provide commentary on our 2023 financial performance and 2024 guidance before opening the call to Q&A.During the February 2023 conference call, I outlined our 2023 priorities, our growth strategy and committed to providing quarterly and annual guidance. Additionally, I emphasized that 2023 would mark a significant turning point for AVITA Medical, a year in which we plan to transform our business [ providing ] multiple new indications, dramatically increase our growth trajectory. I'm pleased to report we did just that.We finished 2023 strong, delivering fourth quarter commercial revenue of $14.1 million, representing growth of 50% over the same period in 2022. This performance highlights our sustained quarterly growth trajectory. For the full year of 2023, we closed with commercial revenue of $49.8 million, representing impressive growth of 46% over the prior year. This is a significant achievement reflecting the effectiveness of our strategic growth initiatives and initial launch of full-thickness skin defects, which I will address shortly.Shifting focus to our recent developments, on January 10, we announced that we entered into an exclusive 5-year distribution agreement with Stedical Medical to commercialize PermiaDerm biosynthetic wound matrix in the United States. PermiaDerm is a transparent, flexible dressing that is cleared by the FDA for use in the treatment of a wide range of wound types until healing is achieved. PermiaDerm's high level of permeability and flexibility allow medical professionals to stretch it, giving the clinicians the ability to customize the porosity to meet the specific needs of the wound. This adjustability facilitates wound healing. Moreover, PermiaDerm can be used alongside the treatment of many of our burn and full-thickness skin defect cases to further aid in healing.The complementary nature of these 2 products and overlapping call points allow us to leverage our commercial organization to effectively integrate PermiaDerm into our selling portfolio. Our commercial organization will launch PermiaDerm during March, and we will update you on this effort during our first quarter call after we have had some experience selling to our customers. The partnership marks the first step in our efforts aimed at expanding our portfolio of wound care products that will facilitate wound treatment.Moving on to our international expansion strategy. Last quarter, I unveiled our plans to expand into Australia and most of the European Union through third-party distribution partnerships. I'm happy to report that PolyMedics, our first European distributor completed their RECELL training and launched within Germany, Austria and Switzerland in January as expected. We will continue to update you as we identify new distributor partnerships.Turning to the PMA supplement for RECELL GO. We have completed the in-house testing that was necessary to fulfill the FDA's request for additional information. As previously stated, we expect to submit our response to the FDA on February 28, 2024. With the restart of the 180-day real-time review, we plan to launch on May 31, 2024. Moving on to the manufacturing and assembly of RECELL GO, we mentioned during our last call that we made the strategic decision to bring the entire manufacturing and assembling process of both the durable and disposable components in-house to our Ventura facility. We will also be completing a service center for the durable that will be located in Ventura. We are on track to complete this transfer ahead of the May 31 launch of RECELL GO.As part of the in-sourcing process, we have been renovating our Ventura facility to increase capacity by tenfold. This expansion will allow also facilitate PermiaDerm distribution. With our Ventura facility serving as the hub for housing and distributing PermiaDerm to our customers, along with our other products. As a result of this expansion, we will have ample space for manufacturing and assembly as well as physical distribution, ensuring efficient operations for the next 5 years of dislocation. These renovations are being completed in phases throughout 2024 with the final phase scheduled for completion during the third quarter.While we work to enhance our operational capabilities to fuel our growth, we are also focused on the next expansion of our commercial field organization. Our primary objective during our first commercial organization expansion, which occurred in the early half of 2023, was aligning our sales strategy with our overall growth strategy by focusing on adoption and new cases for our new indication of full-thickness skin defects. To achieve this, we strategically increased both our sales team from 30 to 70 people in our territories from 14 to 40 to maintain small sales territories and keep our growth rate high. Specifically, we aimed for our 40 territories to average under $2 million to facilitate effective coverage penetration and growth. We should be approaching the $2 million threshold during the latter half of 2024. And therefore, our plan is to expand our sales force and territories again to keep the focus on adoption and growth.Moreover, an expanded sales force will allow us to intensify our efforts in the value analysis committee process, thereby maximizing our ability to capitalize on the expanded label of full-thickness skin defects. Consequently, we are adding 38 new positions to our commercial organization, which will bring our commercial organization to a total of 108. We expect our expanded set field team to be in place by April 1. With our current commercial field organization and our expanded sales force, we expect to add approximately 200 new accounts during 2024.As we discussed during our third quarter call, the broadened scope of full-thickness skin defects provides us with an opportunity to pursue many different applications for RECELL. As part of this pursuit, we must access multiple physician specialties within a single facility to get Value Analysis Committee, also known VAC, approval, resulting in a lengthier sales process. We continue to affirm this expanded indication increases the patient population of RECELL by 10x over the patient opportunity with burns. In line with the expanded label of full-thickness skin defects, we are in the design stage of developing RECELL GO mini.RECELL GO mini is being designed to address smaller wounds, providing us with the opportunity to treat patients with less than 5% total body surface area affected. This device will have the same reusable durable as RECELL GO, will have a different cartridge that accommodates a smaller donor skin sample. We intend to submit a PMA supplement in order to achieve FDA approval by year-end.Now turning to the vitiligo initiative. In January, we completed enrollment of 109 patients in TONE, our post-market study, evaluating repigmentation and its impact on the quality of life for vitiligo patients earlier than anticipated. Our initial 6-month follow-up assessments are scheduled to begin in July. To strengthen the data that we are collecting, we have extended the follow-up period to include an additional assessment at 12 months post treatment. We expect to submit both this study and our separate health economic study for publication by the end of 2024. The study dates position us to begin commercial payer coverage discussions during the second quarter of 2025. Subsequently, we anticipate a phased rollout of commercial coverage on a regional basis with the initial phase likely to begin in the fourth quarter of 2025, supported by an appropriately sized commercial organization as coverage is established throughout the United States.Before turning the call over to David, I would like to address our financial outlook. I previously committed to communicating the quarter in which we achieved cash flow breakeven and GAAP profitability. We are pleased to report that we have established a path to achieve both milestones no later than the third quarter of 2025. In closing, 2023 marked an exciting inflection point for us, and our dedication to innovation and growth continues. We remain resolute in our commitment to unlocking shareholder value through increased adoption and sustained growth within our indications and expansion of our portfolio. I look forward to sharing further updates on our continued progress.With that, I'd like to turn the call over to David.

[David OToole, executive]

Thank you, Jim. We continue to deliver strong financial results. In the 3 months ended December 31, 2023, our commercial revenue increased to $14.1 million, $4.7 million more than the $9.4 million in the same period in 2022. Since Q1 of 2023, we have demonstrated sustained impressive commercial revenue growth rates of 40%, 42%, 51%, concluding the year with a Q4 growth of 50% compared to the same quarters in the prior year. Our strong third and fourth quarter results were largely driven by 3 key factors. First, we were able to capitalize on our pre-existing burn center accounts, of which half also have trauma centers, enabling us to immediately market full-thickness skin defects in those centers, thus boosting sales. Second, we have received VAC approval on a number of new accounts. And lastly, we continue to benefit from increased adoption in the burns market.Gross profit margin for the quarter was 87.3% compared to 86% in the same period in 2022. This significant increase in gross margin was driven by the increase in sales and production of our products. As we have discussed previously, as production and sales increase, we benefit from the fact that approximately 50% of our cost of goods sold is fixed, representing the cost of the facility in Ventura. Total operating expenses for the quarter were $24.7 million compared to $15 million in the same period in 2022. The increase in operating expenses is primarily attributable to an increase of $2.4 million in G&A expenses related to stock-based compensation, consulting expenses and employee-related cost.Additionally, we incurred an increase of $3.4 million in R&D costs, which was primarily due to employee compensation costs, including recruiting costs, accelerated recruitment and third-party costs associated with the TONE study and costs associated with in-sourcing RECELL GO production to our Ventura facility. Lastly, sales and marketing expense increased by $3.9 million, primarily due to employee-related costs, including commissions, travel and promotion expense as a result of the expansion of our commercial organization in the second quarter of 2023.For the full year ended December 31, 2023, our commercial revenue increased by 46% to $49.8 million compared to $34.1 million in the same period in 2022. The growth in commercial revenues was largely driven by deeper penetration within individual customer accounts, along with the launch of full-thickness skin defects through our expanded commercial team. The gross profit margin for the full year was 84.5% compared to 82% in 2022. The gross profit margin for the year was at the higher end of our full year guidance of 83% to 85%. Total operating expenses were $86.4 million compared to $59.1 million in the same period in 2022.The increase in operating expenses is largely attributable to an increase of $15.4 million in sales and marketing costs as a result of the expansion of our commercial organization in the first half of 2023. Alongside this expansion, G&A costs increased by $5 million due to the increased headcount and related salaries and benefits, stock-based compensation, consulting fees and recruiting costs.Lastly, R&D costs increased by $6.9 million, primarily driven by the cost of the TONE study, final work and completion of the PMA supplement to the FDA in June of 2023 for RECELL GO and employee-related costs, including stock-based compensation. Net loss for the fourth quarter was $7.1 million or a loss of $0.28 per share compared to a net loss of $5.4 million or a loss of $0.21 per share in the same period in 2022. Net loss for the full year 2023 was $35.4 million or a loss of $1.40 per share compared to a net loss of $26.7 million or a loss of $1.07 per share in the full year 2022.As of December 31, we had cash, cash equivalents and marketable securities of $89.1 million compared to $86.3 million as of December 31, 2022. During our third quarter conference call, I discussed the credit agreement we entered into with OrbiMed on October 18. As a reminder, $40 million of the total $90 million debt facility was funded at closing. As we have discussed previously, we do not, at this time, foresee a need for either of the remaining $25 million tranches before they expire at the end of this year. With our current cash balance of $89.1 million as of December 31 and our expectations of reaching cash flow breakeven no later than the third quarter of 2025. We are confident that we have sufficient cash reserves to achieve our goals.Turning now to our 2024 guidance. For the first quarter of 2024, we expect commercial revenues to be in the range of $14.8 million to $15.6 million. This reflects a growth rate between 42% and 50% over the same period in 2023. Our annual revenue guidance for 2024 is expected to be in the range of $78.5 million to $84.5 million, which would reflect growth between 57% and 69% compared to the full year 2023. Lastly, during the fourth quarter, we made the decision to reorganize our corporate structure and wind down our legacy foreign subsidiaries to improve the efficiency of our operating and reporting structure. Due to the limited business operations of the foreign subsidiaries, the net impact of the restructuring was a $9.4 million foreign exchange gain or previously deferred unrealized cumulative translation adjustments in equity. This $9.4 million noncash gain was recorded in other income expense on the statement of operations. We expect the restructuring to be completed no later than the third quarter of this year, at which point our primary operating company, AVITA Medical Americas LLC, will be a wholly owned subsidiary of AVITA Medical, Inc., and no foreign subsidiaries will exist.With that, we thank you for joining us. And now I will turn the call back to the operator for your questions.

[Operator]

[Operator Instructions] Our first question comes from Brooks O'Neil with Lake Street Capital Markets.

[Brooks O'Neil, analyst]

Congratulations on the [indiscernible] progress. I have a couple of questions. I guess, first, I would love to get any color you can offer about the experience you're having with the hospitals backs, and then maybe you could just tell us a little bit about the experience you see if you get back approval, getting procedures performed by the surgeons in those hospitals?

[James Corbett, executive]

Hey, Brooks, thanks very much. So first, let me describe the experience we're having. And very broadly speaking, we have well over 100 hospitals in some stage of the back process. What we're experiencing is frankly a longer cycle time related to the broader label. So we're, in most cases, needing to involve 3 or 4 physician specialties and as many as 10 different indications, and of course they're commensurate DRG or reimbursement. So the complexity has unfortunately -- it's a little bit like a wave coming ashore. There's a lot of them and there -- we've been at it now 2 quarters. So they are starting to splash ashore. And it's a good metaphor because everybody is happy when that happens. But the experience we're having is it requires a more intense selling process. And one of the reasons we moved up during the year, our sales expansion is so that we could take advantage in real time and more rapidly that broader label because you've got to -- in one sense, keep in mind that on a patient level, 35,000 RECELL-eligible burn patients, but nearly 400,000 RECELL-eligible full-thickness skin defect patients. So it's really worth it for us to penetrate these hospitals. And we're getting experience in cases that we haven't seen treated before and having very good clinical results. So we're really feeling very good about the progress we're making. So during the year, to answer the obvious, we expect to add approximately 200 new accounts.

[Brooks O'Neil, analyst]

Great. That's very helpful. So perhaps we could just talk a little bit about any progress you feel you're making capturing some of the incremental burn activity within the level 1 and level 2 trauma centers you're beginning to call on.

[James Corbett, executive]

Well, certainly, we are. That's our lead clinical data and our lead clinical experience commercially over the last few years. We find them in the Level 1 trauma centers. And the physicians typically are well aware of RECELL because they go to burn meetings. They just were not reached by our sales coverage model in prior years. So we're getting progress in those instances and much more to get as you -- because that VAC becomes more complex, right, as I was describing earlier. But we are seeing those cases.

[Brooks O'Neil, analyst]

Great. Let me just ask one more. Appreciate all the color. Obviously, last year you had a substantial expansion of the sales force and now we're embarking on a second expansion. Can you just talk a little bit about, let's call it, your experience with the first expansion and your confidence that you can find the right people to complete the second expansion.

[James Corbett, executive]

Well, I can tell you, on January 18, I was at our national sales meeting in Dallas, where we celebrated and did the very common awards for the sales team. And what was really impressive is how many of them have become really successful and have great momentum in their territories. And at the same time, our experience has been that we have the ability to really make the expansion happen rapidly because we are growing and we have a proprietary technology, and it's a technology and company that for the sales rep really creates a special opportunity. We initiated the sales expansion after that national sales meeting, and we expect to be complete hiring by the end of March. So that is an indirect indicator of the demand that exists in the marketplace to come to work for AVITA.

[Brooks O'Neil, analyst]

Congratulations on the terrific results.

[Operator]

Our next question comes from Joshua Jennings with TD Cowen.

[Unknown Analyst]

This is [ Eric ] on for Josh. Within guidance for 2024, could you help us understand what you're assuming for some of your different growth opportunities here? I'm thinking the launch of full-thickness and RECELL GO. How much of the growth in 2024, do you think these opportunities will account for?

[James Corbett, executive]

Well, first of all, our guidance anticipates growth of between 57% and 69%, so substantial growth. RECELL GO will essentially replace the RECESS manual system. So it's not quite -- it's not quite -- it's not very easy to separate them because RECELL GO as a durable will not actually create a sales dollar by itself, the disposable that, and cassette that goes with it that processes the and disaggregates the skin will replace the RECELL kit. So from an assumption point of view, it is really driven by RECELL penetration into full-thickness skin defects. That is the really big growth area. We continue to gain share in the core burns business. But in time, that will become the minority of our total business relative to full-thickness skin defects. So when we -- I mentioned earlier that we expect to add approximately 200 new accounts during the year, the principal sales of those will all be -- not all, but the vast majority of the full-thickness skin defect cases. So that's the real driver. Is that helpful?

[Unknown Analyst]

That is. And then maybe thinking internationally, should we be thinking of contributions from Europe and your distribution partners there? Is that a real driver for '24? Or is that something that might take a little bit more time and maybe we should be thinking 2025.

[James Corbett, executive]

Yes. Well, regarding international. As we mentioned, we've signed our first European distributor, which is covering the countries of Germany, Austria and Switzerland, the company is PolyMedics. Now they have been trained and they've done their -- they started their initial launch and have had initial cases. We think that the volume will build through the year, though, however, because just like any sophisticated market these days as similar as in the United States, they don't have exactly a VAC committee. They have something equivalent though. So we'll be adding additional distributors in other European markets throughout the year. Our goal is to finish the year with Europe largely covered. We will be making contributions and projections as we get a little momentum behind us and understand the demand pattern is going to emerge from, in this case, Germany, Austria and Switzerland. And we will update our guidance in that -- with that in mind. But '24 will be the year to get the foundation in place of all our distribution partners and '25 will be where I think we see material revenue.

[Operator]

Our next question comes from Matthew O'Brien with Piper Sandler.

[Unknown Analyst]

This is [ Phil ] on for Matt. Congrats on all the progress. I guess just starting on guidance. Appreciating that guidance is back-half weighted, do you expect an inflection as you start to knock down some of these VACs? Or is it going to be more measured? So I guess just any color on cadence as guidance implies a reacceleration of growth of more difficult comps?

[James Corbett, executive]

Well, actually, there's a couple of drivers. The VAC approvals that we're receiving here in the first quarter and that we will receive in the second quarter, will be more fully productive during the second half. So that's a reflection. And any time you convert a new account, you get increased adoption over the coming year following. So that is incorporated. We also are expecting, as you learned earlier that RECELL GO will launch May 31. And RECELL GO will replace our manual RECELL and will make cases easier to do, require less clinical support. So there's no direct sales tied to RECELL GO per se, but the conversion of our business to using RECELL GO as our delivery vehicle does reduce the training requirement for the customer and for our sales organization and inevitably will cause higher productivity. So those are rather core assumptions in our model.

[Unknown Analyst]

That's helpful. And then I guess as a follow-up, can you talk about your strategy when it comes to filling the bag with additional products, specifically as it relates to Stedical Scientific and maybe any other products that you feel AVITA will need down the road?

[James Corbett, executive]

Yes. Sure. Well, what our mission is, is to help the patients and physicians that use our products and have our products used on them. And with RECELL, we have a real opportunity because we have a very well proven at this point, technology that does not have a direct competitor. And we are in cases with these patients who have very significant injuries and wounds. And there's other products that surround the use of RECELL that we can bring and support our customer with and help solve their clinical problems. So PermiaDerm is an example of that. The wound matrix is porous, it's see-through. It's much more convenient to manage the wound with, for example. It can be used in some cases in conjunction with RECELL in many cases that we use on its own. So it is a meaningful -- from a technical point of view, it's a call point overlap of almost a full Venn diagram. There are other products that are similar. I think the dermal scaffold is a very important technology for us to invest in, and we've been researching that field and expect to find a suitable technology in the coming year. So I think there are -- there may be -- there's likely others that overlap this call point and overlap this patient population and physician population. And we are going to really develop our company into a broader wound care -- acute wound care company.

[Operator]

Our next question comes from Ross Osborn with Cantor Fitzgerald.

[Ross Osborn, analyst]

Congrats on the progress. Maybe just one for me on RECELL mini. Would you just spend some more time on the rationale for developing this product and why RECELL GO may not be as attractive for smaller wounds.

[James Corbett, executive]

So RECELL GO, thanks for the question, Ross. I understand what you're asking. So let me walk you through. So RECELL GO replaces the manual RECELL kit. And that RECELL kit covered 1,920 square centimeters, which is about 10% TBSA. What we find in full-thickness is that a very significant portion of the cases the patients have, the physicians have, excuse me, are under 500 square centimeters. And it's very simple that to the customer, to the surgeon using a product that's designed for 10% TBSA to treat some, a wound that is under 5% TBSA doesn't quite make sense to them. It seems wasteful. So what we -- the reason we'll have RECELL mini, so RECELL mini is merely a cassette that has less tissue volume than the RECELL GO standard cassette. So they'll both fit into the RECELL GO durable. And if you're treating a smaller wound, you'll use RECELL mini, if you're treating a larger wounds, you'll use the RECELL GO standard. Is that helpful?

[Operator]

Our next question comes from Ryan Zimmerman with BTIG.

[Ryan Zimmerman, analyst]

Want to ask about the assumptions kind of underpinning your long-term profitability comment. I know it's a little too early to guide for '25, but maybe help bridge us from here to there and kind of what the revenue levels are or what the expense -- how the expenses kind of track in your mind to get there, especially in the context of adding all these reps again. Just want to make sure investors understand your thinking there.

[James Corbett, executive]

Well, we're not ready to give guidance for any of those elements for '25, but I can give you some directional thoughts. On the revenue growth line, 57% to 69% growth rate. Our gross profit has been and will continue to be on the RECELL 85%. And so, the revenue exit rate you can back into, I think. And then you can calculate the profitability into Q3 or before of '25. I would say, it depends very fundamentally on maintaining a growth rate of greater than 50%, first of all. And so that means we'll accelerate in our guidance in this case, not only are we having heavier revenue in the back half, we'll have a bigger organization. So of course, we should. And that growth rate is actually accelerating against the second half of last year. So that means that's the growth rate we go into in 2025. So I think the combination of growth rate, greater penetration into these new accounts with the larger sales footprint. Remember, it only takes 5 kits a month for a rep to breakeven in cost. So we've just learned about that again from our -- we had learned it in when we had burns and we just learned it in the first 2 quarters of the full-thickness launch. Because keep in mind that much bigger market, we've only been in 6 months. And we -- by the time we expand the sales force a second time, we'll have only been in 9 months. So 2025 reflects penetration into that very deep market of full-thickness. Is that helpful?

[Ryan Zimmerman, analyst]

Yes. Very helpful. And I appreciate the color there. Maybe just to ask another question. Given you're in the value analysis process right now with a lot of facilities with the manual RECELL system, and then behind that, you're going to introduce the RECELL GO system. And design is one where you're not collecting revenue for the system itself, but you have the consumable component. I'm just wondering how are you smoothing that process so that there are no kind of air pocket when you go in to try and switch out and maybe change the business model a little bit with RECELL GO, appreciating the benefit that offers, but these are bureaucratic institutions that you're selling into. And you just want to make sure that there's no kind of impact as a result of that.

[James Corbett, executive]

Yes. It's a really good thought. The first principle of the RECELL GO launch is to make it easy for our customers and for them to understand that to get RECELL, the [ RES ], the what we call the [ CVAP ], the Spray-On Skin to get it, they will have to buy RECELL GO cassettes. So 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.

[Operator]

Our next question comes from Chris Kallos with MSTF.

[Chris Kallos, analyst]

Good to see the result. Congratulations. I just wanted to pick up on adjacent products to the portfolio with PermiaDerm. And just, you mentioned scaffolds, and I imagine there are other adjacencies that you can look into. How does that impact your thinking around the sales force and how they're going to balance different products coming online? My first part of the question. And the second part is, do you have any thoughts around taking those products into international markets?

[James Corbett, executive]

Yes. So multiple questions there. So with respect to the adjacent products, these are products that all fit the following definition. They are used on the same patients, by the same physicians, so -- and the same indications. So our rep is rather uniquely positioned because RECELL is a brand with, frankly, a bit of a halo. It doesn't have a direct competitor. The sales rep has good access to the hospital and to our customer base. So having other products today that our customer might need is a real leverageable opportunity. So we think that this is additive in terms of value add to our customer and additive impact to what we bring the hospital in terms of fewer vendors and additive to, of course, our results as a company. So the biosynthetic wound matrix of PermiaDerm fits so many more applications than RECELL. And often, when we're selling RECELL or promoting it or discussing possible uses of it with a doctor, we might discuss several different patient indications and different patients before a RECELL is chosen to be used on a patient. But all of those patients will be candidates for PermiaDerm in this case. So it will give our reps an opportunity to have many reasons to fulfill the needs of the customer. Now to your last question, the PermiaDerm relationship is currently, and the contract is a domestic U.S. agreement only. Notwithstanding it's a very -- it's built as a real partnership in the way we're structured in this relationship. So we expect to be with PermiaDerm for a lot of years.

[Chris Kallos, analyst]

Great. And that's very helpful. And in terms of going international with products like PermiaDerm, are you thinking that way at this point?

[James Corbett, executive]

We're not really thinking much that way at this point, primarily because we're really in the nascent stage of our international strategy. We're just so early that the priority is to establish RECELL first, and we'll be doing that. And that will take some time. So I don't -- it isn't a priority to strengthen that portfolio. In fact, what we're finding is the distributors that we're considering, including the one we did sign with in Europe, all have a broader portfolio already, which helps the -- helps them sell more RECELL. So I think at the moment, this is a domestic U.S. strategy.

[Operator]

Our next question comes from Madeleine Williams with Wilsons.

[Madeleine Williams, analyst]

In regards to going back to, I guess, the bottleneck with launching into the trauma centers. I mean how much color do you get of what the process, ongoing process is like and whether you're going to be able to get that uplift in the second half, just taking into account the guidance that you've given for the first quarter and then obviously full year guidance.

[James Corbett, executive]

Well, Madeleine, I think it's a good question. I think we're largely through the consequence of the more consequent -- the more complex value analysis committee process because we've started them and we continue to start more and they're coming out. The new accounts are coming out of the process and we started new ones. So it slowed us a little bit in the fourth quarter, but not much. And but we do note that it is different and it is more complex. But what comes with that is a much bigger market with many more patient indications and many more possible treatment candidates. So I think right now we're, probably after this call, you won't hear much about VAC other than we're progressing really well and we're hitting our targets for the year. And I've mentioned that we expect to add nearly 200 new accounts for the year. And we're on a good pace here in the first quarter to make that happen.

[Madeleine Williams, analyst]

Yes. Okay. That's great color. And just in regards to, I guess, in translating that access into sales, I mean, I know there's some crossover with the surgeons utilizing in both burns and then sort of more trauma surgeons. But are they sort of already aware of being able to utilize RECELL? And is the discussion in terms of the difference between RECELL and RECELL GO already happening?

[James Corbett, executive]

Well, the difference between RECELL and RECELL GO, first of all, the output of the 2 of them is the same. But since we don't have FDA approval, we're not discussing RECELL GO with customers at this moment. That we have to wait for approval for. I don't think that will be a big challenge for them. We've done private focus groups with them to talk about how we're going to introduce the product. It's going to be a, I think the word is a wholesale conversion of our business model. So all customers will -- who want to use RECELL will do so with a RECELL GO durable and use the RECELL [indiscernible]. So it will be a conversion that we execute during Q3.

[Operator]

Our next question comes from Lyanne Harrison with Bank of America.

[Lyanne Harrison, analyst]

If I could come back to the conversations you're having about RECELL GO, I know you mentioned that it hasn't been launched yet. But if I think about rest of the world, how familiar is the rest-of-the-world surgeon community familiar with RECELL currently as it is? And how should we think about the rate of adoption there? And then secondly, with the PolyMedics training, did you also have them trained on RECELL GO so that they're ready to go when the launch occurs in May?

[James Corbett, executive]

Got it. Okay. Let me make sure I line them all up. There is, across Europe and Australia and Japan I'd say good to moderate familiarity with RECELL already. That said, we were not commercial in anywhere but Japan during this time. So I think we're introducing RECELL into a market where most are going to be new. Now with respect to RECELL GO and let's just take Europe first, we are launching RECELL the -- it's called RECELL 1920, which is the standard system in Germany, Austria and Switzerland now. And when RECELL GO gets its CE mark through the MDR, which we expect sometime in the third quarter, they will converge. So some distributors and some customers in Europe, depending on when we signed a distributor may see RECELL for the first time in the RECELL GO configuration and not have ever seen the original RECELL or not have used it. So I think it will be a matter of timing on that level. And no, we didn't train PolyMedics on RECELL GO. That will be something we'll do when the product is approved.

[Lyanne Harrison, analyst]

Great. And then if I think about gross margin, so obviously, well, for this quarter, you had a material improvement in gross margin. I guess that you talked about for 2024, you mentioned, you guided to 85% gross margin. Is there any reasoning why you don't think you could maintain that high watermark of 87% going into '24, particularly given you're increasing your volumes over that period?

[James Corbett, executive]

Yes. It's a good question. So first of all, just to be precise, I didn't exactly give guidance of 85%. We've been operating in that territories or my words. And I want -- and there's a reason I'm emphasizing that. Our margin with PermiaDerm will be 50%, not 85%. On RECELL, we will very likely be in that 85% range. And you may have captured during the call that we're making some investments in our manufacturing operation, rather substantial, frankly. And that couple of margin points makes a little bit of -- it does make a little difference when you completely rehab the facility. So our cost structure has gone up a slight bit on the one hand. And on the other hand, we will be introducing into our mixed gross profit, a 50% gross profit product.

[Lyanne Harrison, analyst]

Okay. Great. And one last question for me is on operating costs. So in 2023, we saw 43% in operating costs, which pretty much is in pace with your revenue growth over that period. Should we expect that again for 2024? Or do you expect some operating leverage, particularly towards the second half of '24 given that you mentioned you might get acceleration of revenues there?

[James Corbett, executive]

I'm going to have David jump in on this one.

[David OToole, executive]

Yes. We don't see that same sort of percentage in 2024. We are expanding our sales force. So from a sales expense standpoint, there will be an increase. But the R&D expense is not going to increase by 43% again, as well as G&A is not going to increase either. So there will be leverage, as you indicated, as our revenue accelerates at the -- towards the end of the year and the second -- the third and fourth quarter, you will see a decrease as a percentage in operating expenses when compared to revenue.

[Operator]

I would now like to turn the call back over to Jim Corbett for any closing remarks.

[James Corbett, executive]

Well, thank you very much to all of you for joining our call today. We look forward to our next earnings call to announce our progress in Q1. Looking forward to hearing from all of you soon. Thank you.

[Operator]

Thank you for your participation. You may now disconnect.