© Copyright 2013, Zacks Investment Research. All Rights Reserved.

Avita Medical Ltd (AVMXY-OTC)

Current Recommendation Buy

Prior Recommendation N/A

Date of Last Change 06/10/2013

Current Price (09/12/13) $2.28

Target Price $4.00

UPDATE

SUMMARY DATA

Risk Level Very High / Speculative

Type of Stock Small-Growth

Industry Biotech

In June 2013, we initiated coverage of Avita Medical with a Buy rating and $4.00 price target. We are big fans of the company s ReCell® Spray-On Skin system. ReCell is an autologous cell harvesting, processing and delivery technology that enables surgeons and clinicians to treat complicated skin defects, including chronic wounds, scars, burns, depigmentation, and aid in rejuvenation or reconstruction procedures that uses a patient s own skin cells to facilitate the regenerative process.

We believe the many clinical opportunities with ReCell makes the shares of Avita highly attractive for long-term investment.

52-Week High $2.85

52-Week Low $1.94

One-Year Return (%) N/A

Beta -0.04

Average Daily Volume (sh) 11,179

Shares Outstanding (mil) 16

Market Capitalization ($mil) $37

Short Interest Ratio (days) N/A

Institutional Ownership (%) 0

Insider Ownership (%) N/A

Annual Cash Dividend $0.00

Dividend Yield (%) 0.00

5-Yr. Historical Growth Rates

Sales (%) N/A

Earnings Per Share (%) N/A

Dividend (%) N/A

P/E using TTM EPS N/A

P/E using 2013 Estimate N/A

P/E using 2014 Estimate N/A

AVMXY The Many Clinical Opportunities With ReCell

Small-Cap Research

scr.zacks.com

111 North Canal Street, Chicago, IL 60606

September 12, 2013

Jason Napodano, CFA 312-265-9421

jnapodano@zacks.com

ZACKS ESTIMATES

Revenue (In millions of $)

Q1 Q2 Q3 Q4 Year (Dec) (Jun) (Jun)

2013 1.9 A 2.2 A 4.1 A 2014 2.1 E 2.5 E 4.5 E 2015 6.2 E 2016 11.2 E

Earnings per Share (EPS is operating earnings before non-recurring items)

Q1 Q2 Q3 Q4 Year (Dec) (Jun) (Jun)

2013 -$0.02 A -$0.01 A -$0.03 A 2014 -$0.01 E -$0.01 E -$0.02 E 2015 -$0.02 E 2016 -$0.01 E

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WHAT S NEW

Recent Financials

On August 29, 2013, Avita Medical reported financial results for the six months and full year ended June 30, 2013. Total revenues in the six months ended June 30, 2013 were $2.18 million, up 13% over the same period in 2012. Revenues were driven by $1.46 million in product sales, consisting of sales of the ReCell® Spray-On Skin product in Europe and sales of the Breath-A-Tech® spacer and Funhaler® children s inhaler in Australia, and $0.72 million in grants relating to the U.S. Department of Defense and other income. For the full year 2013, revenues totaled $4.05 million, consisting of $2.82 million in product sales from ReCell, Breath-A-Tech, and Funhaler, and $1.24 million in grants and other income. Revenues for the fiscal year 2013 declined by $0.55 million, primarily the result of the termination of respiratory patents in May 2012 for which ReCell was previously receiving royalty income, a larger order from a Chinese distributor in December 2011 and June 2012 to conduct a clinical trial, and a large stocking order by a Russian distributor in November 2011 for which ReCell later terminated the relationship due to poor performance. We are unconcerned with the modest drop in revenues year-over-year. Revenues are not the primary driver at this point; the clinical data is the primary driver, and all programs are currently on track.

Gross margin on product sales was roughly 76% in 2013, but has been steadily rising over the past year from 71.6% in fiscal 2012 to 73.6% in the first half of 2013 to 78.2% in the second half of 2013. Operating expenses totaled $12.27 million, consisting of $2.60 million in R&D, $8.92 million in SG&A, and $0.07 million in other expenses. The company reported a net loss for the six months ending June 30, 2013 of $4.21 million, or $0.24 per share U.S. ADR. For the full year fiscal 2013, loss totaled $7.96 million, or $0.52 per ADR.

As of June 30, 2013, cash and cash equivalents totaled $10.6 million. Net cash used in operating and investing activities for the full year 2013 totaled $7.3 million. Cash burn was offset by raising net $9.7 million through financing activities during the twelve month period ending June 30, 2013. For fiscal 2014, we forecast revenues of $4.5 million, operating expenses of $13.2 million, and a net loss of $8.8 million. We find the company s current cash balance of $10.6 million to be sufficient to fund operations into the second half of 2014. That being said, we would not be surprised to see the company enter into financing transactions over the next several months to increase the cash run-way into calendar 2015. We also believe, on a financial and corporate governance standpoint, the company qualifies to list on a major exchange, such as the NASDAQ. Avita simply needs to start reporting financial results in U.S. GAAP on a quarterly basis. We would view an uplisting to the NASDAQ as a major positive for the stock, as we see Avita as significantly under-valued today and only limited by awareness and investability for U.S. retail and institutional investors.

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INVESTMENT THESIS

U.S. Pivotal Burns / Scalds Trial Continues

A burn (caused by dry heat) or a scald (caused by wet heat) can cause significant damage to the skin and skin structure, and in moderate-to-severe cases immediately medical attention is required to prevent long-term scarring or skin loss. In the U.S., each year an estimated 12,500 children under the age of five are taken to an emergency room for serious burn of scald (U.S. CDC). Roughly 20% will be admitted to the hospital because the burn or scald is so severe. The data for Europe is similar. We found statistics from the UK at around 2,000 ER visits and 500 hospital admittance for children under five with severe burns or scalds (UK NHS).

Avita is currently conducting a phase 3 (NCT01138917), pivotal study on the use of ReCell in treatment of burn wounds. The trial has commenced with a handful of investigational sites in the U.S. actively enrolling patients. The study is anticipated to enroll a total of 106 patients. The last update from management estimates full enrollment by the middle of 2014. Thus, we expect top-line data late 2014, with full data in 2015. The company tells us that feedback from participating surgeons has been enthusiastic to date.

The trial has two primary outcome measures: 1) recipient site wound closure for ReCell and STSG at week 4 (non-inferiority), and 2) healing of the donor site for ReCell vs. STSG at week 1 (superiority). Secondary outcome measures include percent of epithelialization at week 16, wound closure at week 2, pain (visual analogue scale), and appearance / color matching at week 16, and physician assessment of patient satisfaction at week 16.

Based on the available published data (Gravante et al, 2007) and several case studies (some presented below), we are very confident that non-inferiority on the primary endpoint of healing at the recipient site at week 4 will be achieved. However, where we see the big potential advantage for ReCell is on the other primary endpoint, healing at the donor site, and in several of the secondary endpoints such as pain, appearance, color matching, and physician assessment of patient satisfaction. Based on the size and depth of the donor site for a split thickness meshed skin graft vs. the postage-stamp sized site required for ReCell, we are confident that superiority will be achieved. We present several case studies below that give us confidence in many of the secondary endpoints.

Avita has received considerable funding from the United States Department of Defense (DOD) for clinical studies with ReCell. The DOD has granted Avita Medical $2.623 million in funding for the phase 3 / PMA study in burns note above via its AFIRM (Armed Forces Institute of Regenerative Medicine) program. Avita has also received funding from the DOD s Manufacturing Technology Program (OSD/MIBP) that has provided an additional $1.787 million in funding for the U.S. phase 2 / pilot study in scars. In total, the U.S. DOD has granted Avita a total of $4.41 million in funding for support of ReCell. We note if approved, the DOD/AFIRM program would also assist in training and roll-out of the ReCell device to hospitals and burn centers. We see the DOD s involvement with ReCell as a significant endorsement of the product, and are pleased to see that the majority of the funding for the phase 3 / PMA trial in burns noted above has been funded from outside sources.

Case-Study # 1: 12 month old child scalded by hot cup of tea (source: Avita Medical website)

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Case-Study # 2: 12-month old with scald of hands (source: Avita Medical website).

Case-Study # 3: 6 year old child with contact burn on feet (source: Avita Medical website).

Case-Study # 4: Adult male with facial burn (source: Avita Medical website).

Prep & Debridement 3 Weeks Post ReCell 10 Months Post ReCell

Case-Study # 5: Pediatric deep partial-thickness scald (Dr. Jeremy M. Rawlins FRCS).

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Vitiligo Pilot Study Completes Enrollment

Vitiligo is condition that causes depigmentation of sections of skin. It occurs when melanocytes, the cells responsible for skin pigmentation, die or are unable to function. Patches can begin in late adolescence up to middle age. The patches are initially small, but can often enlarge and change shape over time. When skin lesions occur, they are most prominent on the face, hands and wrists. Depigmentation is particularly noticeable around body orifices, such as the mouth, eyes, nostrils, genitalia and umbilicus. Some lesions have hyperpigmentation around the edges. Patients with vitiligo may be stigmatized for their condition and experience depression or similar mood disorders.

In the U.S., there are an estimated 2 million cases of vitiligo (~0.75% prevalence), with the most common form being non-segmental vitiligo that tends to appear in symmetric patches, sometimes over large areas of the body. Prevalence rates outside the U.S. range between 0.5% and 1.5% (source: NIAMSD). The cause of vitiligo is unknown, but research suggests that it may arise from autoimmune, genetic, oxidative stress, neural, or viral causes. Michael Jackson announced publicly in a 90-minute interview with Oprah Winfrey in February 1993 that he had vitiligo. This was confirmed by the autopsy report following his death in 2009 (CNN, May 2013).

We note there is no true standard-of-care for vitiligo. Treatment for vitiligo includes a number of moderately effective options. Many patients begin with vitamin B6 creams and make-up to hide the depigmentation of the skin. However, exposing the skin to UVB light is the most common treatment for vitiligo. UVA light can also be used. Patients can spot treat themselves at home, or undergo treatment at a clinic of hospital in severe cases. UVB / UVA phototherapy does work in some patients, but treatment can be long, expensive, and unpredictable. Potential risks include burns and skin freckling. Pharmaceutical immunomodulators such as Prograf, Advagraf, Protopic, and Elidel are also commonly used with varying degrees of success.

Avita is currently conducting a randomized, pilot study (NCT01640678) comparing the use of ReCell to CO2 laser abrasion plus UV-therapy. The 10-person pilot study is being conducted by Avita at The Netherlands Institute for Pigment Disorders. The trial completed enrollment on August 21, 2013. Albert Wolkerstorfer, M.D., of the Netherlands Institute for Pigment Disorders, the Principal Investigator of the study, noted "We are pleased to have completed enrollment in the study and believe ReCell offers promise as a potential therapy in the management of stable and segmental vitiligo patients." If successful, it could be an important driver of potential use for the product in vitiligo and other pigmentation defects. We expect Dr. Wolkerstofer to presents initial results from this pilot study in the next month or so.

Case-Study # 1: Stable vitiligo on the shoulder (source: Avita Medical website).

Pre-Treatment 4.5 Months Post-Treatment

Case-Study # 2: Stable vitiligo on the hands (source: Avita Medical website).

Pre-Treatment 6 Months Post-Treatment

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RESTORE Venous Leg Ulcer Study Initiates

On August 1, 2013, Avita announced the initiation of enrollment in the RESTORE trial, a multi-center, randomized European clinical trial evaluating the use and effectiveness of ReCell Spray-On Skin in the treatment of patients with chronic venous leg ulcers. RESTORE will seek to enroll 65 patients that have unhealed venous leg ulcers for a minimum of 12 month. Following a two-week observation period, patients will be randomly assigned for treatment with ReCell or the current standard of care and will be followed for a minimum of 12 weeks post-treatment. Enrollment began with three patients at the Addenbrooke's Hospital in Cambridge, UK. It is anticipated that additional study centers in Denmark, France and Germany will participate in the trial.

The company believes the management and treatment of lower limb ulcers represents a large and growing market opportunity for ReCell. The design for RESTORE (NCT01743053) is based on positive preliminary results achieved with the use of ReCell in the treatment of over 50 venous leg ulcer patients. We believe ReCell is uniquely positioned among wound care products as it shares autologous cultured skin's potential for long-term engraftment of the applied cells, yet also provides the rapid turnaround of cultured allografts and advanced wound dressings, while also potentially providing the growth factors and other supportive functions of products based on live cells.

Several papers have been published on the use of ReCell to repair chronic ulcers. A paper by De Angelis et al, in the International Wound Journal, entitled, 'The use of non-cultured autologous cell suspension to repair chronic ulcers," (February 2013) evaluated the clinical effectiveness of ReCell in 20 patients (8 men, 12 women with an average age of 70 years). Complete ulcer healing, defined as 100% re-epithelialization was observed between 40 and 60 days in 14 patients (70%) depending on the type of ulcer and comorbidity. At day 60 post-procedure, 80% re-epithelialization was present in five patients (25%), while one patient with concomitant psoriasis had 50% re-epithelialization. The authors found no worsening of infection post treatment. Additionally, pain scores improved by day 7 post the ReCell procedure, and patient satisfaction was high. The authors note that function and aesthetics of the ReCell-treated patients were good, and conclude that the ReCell technique may have provided the regenerative tissue stimulation necessary for the rapid healing of chronic ulcers, including those not responsive to more traditional methods.

Another paper published by Giraldi et al, in Acta Vulnologica, entitled, "Preliminary results with the use of a non-cultured autologous cell suspension to repair non-healing vascular leg ulcers," (2012, Vol.10,No.3) concluded that ReCell was effective in restarting the repair process of non-healing ulcers and in reducing pain. Giraldi et al looked at 12 vascular leg ulcers for their paper. The mean wound surface area for the small study (n=7) was 51.9 cm2 (range, 1-320 cm2).

The results show a mean time to healing at about 28 days for 2 small ulcers (1 and 2 cm2, respectively) of 3 month duration. Wound surface area in the remaining 10 ulcers decreasing by 25% to 90%, with a mean of 55%. The mean epithelialization at week 4 was 70% (range, 60-93%). Four ulcers did not heal during the 4- week follow-up period, but all healed completely within 24 weeks. Results also show a significant reduction in pain and high patient satisfaction. The consistency of the ReCell data to date is very encouraging. Giraldi et al concluded that treatment was simple and easy to apply, well tolerated by the patients, and devoid of complications. Below is an example of the data generated by Giraldi et al and published in their paper in Acta Vulnologica in September 2012.

Overall, these studies are encouraging, and though the data is limited, suggest that the ReCell system could offer a convenient, cost-effective, and potentially more efficacious treatment for venous leg ulcers than existing treatments. The range in wound size in the RESTORE trial is between 2 cm2 and 80 cm2. Outcome will be compared between study participants receiving standard care (debridement, compression therapy) and ReCell in addition to standard care. The primary outcome measure will be the percentage of patients with complete ulcer closure 12 weeks after treatment. Secondary measures will include determinations at each visit (Weeks 1, 2, 4, 6, 8, 12, 24, and 52) of wound volume, wound area, pain, recurrence, and quality of life. Top-line results are expected in early 2015.

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Scarring, Aesthetic & Reconstructive

Over 25 million American s have some sort of visible scar. Avita is conducting a prospective, multi-center randomized, double-blinded, controlled feasibility study to evaluate safety and tolerability, and preliminary effectiveness of the ReCell device for healing of the acute wound associated with a dermabraded split thickness meshed graft (dSTMG) scars. The trial (NCT01476826) seeks to enroll a total of 20 patients with dSTMG scars (minimum of 50 cm2 to a maximum of 320 cm2) and compare one treatment with ReCell versus standard of care (dermabrasion). The target endpoints are safety, along with clinical healing, scar assessment, and pain.

Case-Study # 1: 27 year old female with hypertrophic dyspigmentation on the neck (Dr. Fiona Wood).

Case-Study # 2: Adult female with surgical scar (Dr. Gebhard Gramlich).

Case-Study # 3: Adult male with severe acne scarring (source: Avita Medical website).

Pre Treatment Post ReCell

Case-Study # 4: Adult female with atrophic facial scarring from acne (Dr. Zahida Butt).

Pre Treatment 12 Months Post ReCell

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We remind investors that the CE Mark approval in the EU allows for use to disaggregate cells from a patient s split-thickness skin biopsy and to collect these cells for reintroduction to the patient in autologous applications as determined by the physician. We can see use of the ReCell system for cosmetic and rejuvenative / reconstructive procedures.

Case-Study # 1: Adult female seeking facial rejuvenation (Dr. Gebhard Gramlich).

Case-Study # 4: 18 year old female after an avulsion injury by a dog bite (Hivelin et al, 2012).

Pre -Reconstruction 3 Month Post-Recon (ReCell use for color mismatch)

23 Months Post-Recon (20 months post ReCell)

How Big Is ReCell?

We love the concept of ReCell. The product is simple to use, affordable, and based on the number of papers we ve read and case-studies we ve seen, it works. Of course, proof that the product works will need to be confirmed in several of the ongoing clinical studies, the lead of which is the pivotal U.S.-based phase 3 on the use of ReCell in treatment of burn wounds. We remind investors that the bulk of this study is being funded by a grant from the U.S. Department of Defense AFIRM Program the second such award by AFIRM to Avita Medical totaling $2.623 million. The recently initiated RESTORE clinical trial studying ReCell for the treatment of chronic venous leg ulcers is another very important program for the company.

With respect to the burn / scald study, one simply cannot look at the case study data presented above, especially in toddlers and infants, and not root for success of this trial. In the U.S., there are an estimated 250,000 emergency room visits each year for severe burns (source: National Fire Protection Association). Another 200,000 burns and scalds are treated at clinics and medical offices. The majority of these burns are from non-firm contact burns or scalds. In roughly 20% of these cases, the patient will require admittance to the hospital for treatment. Children under the age of five are 5-times more likely to have a severe burn than the general population. Fire-related burns are also among the leading causes of disability-adjusted life years (DALYs) lost.

We believe the pivotal study comparing ReCell to meshed skin grafting will be successful i.e. hit on both primary endpoints and several secondary endpoints including pain, appearance, and physician assessment of patients satisfaction. We base this belief on the available published data and several presented case studies. Above we briefly discuss the Gravante el al paper that compares ReCell to classic skin grafting for the treatment of deep partial thickness burns. However, something that Gravante et al did not address, but is of significant importance when evaluating the commercial success of ReCell, is the psychosocial impact of the aesthetics of skin grafts.

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We note that psychological morbidity is extremely common following severe burn injury, with clinical evidence of acute stress disorder, post-traumatic stress disorder, or depression observed in up to 45% adult survivors (Wiechman et al, 2004, McKibben et al, 2008). While there are limited studies available on the psychosocial implications of skin grafts, it is intuitive to assume if an alternative to scarred, pebbled, mismatched skin was available, and along with this, the need for a larger donor site were removed, this would be enthusiastically welcomed by the affected skin graft cohort.

Based on the simplicity of use and success of the phase 3 / PMA trial noted above, we believe ReCell could capture between 25% and 40% market share among the 250,000 severe burns in the U.S. that require a trial to the emergency room. Assuming an average cost per use at around $1,000 per treatment, 25% market share equates to a market opportunity at around $62.5 million. With 40% market share, the sales opportunity, in the U.S. alone, is $100 million. We note that we not including another 200,000 or so patients that receive treatment for burns and scalds at clinics and family / general practitioner offices, believing that if these burns are not severe enough to warrant an immediate trip to the emergency room, then they are likely treated with creams and advanced dressings instead of skin grafting. However, we see the opportunity for ReCell outside the U.S., in Canada, Europe, Australia, and Japan as easily another $100 million. This brings the total potential opportunity in burns and scalds to $200 million in a global basis.

Besides burns and scalds, we believe ReCell has meaningful potential to capture market share in acne scarring (25+ million Americans), vitiligo (~200,000 Americans), and aesthetic and/or reconstructive procedures (~1 million Americans). These opportunities add another $50+ million in the U.S., and $100 million in a global basis to our sales forecast. We are eagerly awaiting additional case study and pivotal trial data in these indications.

Approval for use in chronic wounds has the potential to double that peak sales number to $500+ million in our view. Chronic non-healing wounds are an enormous and growing market. Above we noted that products like Dermagraft, Apligraf, and Regranex produce sales in excess of $400 million. With strong data, we believe that ReCell can be a major player in the market next to these multi-hundred million-dollar products. We base these aggressive forecasts on our belief that ReCell has several important characteristics:

Safety: ReCell is an autologous product that allows for a potential very small (~1 cm2) biopsy area.

Scalability: ReCell does not rely on donor foreskin or cadaveric skin.

Applicability: A 1 cm2 biopsy area has the potential to treat a wound in the area of 80 cm2.

Simplicity: The procedure to prepare and produce ReCell is only 30 minutes.

Versatility: Avita Medical has shown positive case-study data in burns, scalds, vitiligo, acne scars, reconstructive procedures, rejuvenation procedures, and in the treatment of chronic wounds.

Efficacy: Although confirmation is still ongoing in the form of pivotal and proof-of-concept programs, the published literature and case-study data to date is highly encouraging with respect to the efficacy of ReCell.

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RECOMMENDATION

In June 2013, we initiated coverage of Avita Medical with a Buy rating and $4.00 price target. We are big fans of the company s ReCell® Spray-On Skin system. ReCell is an autologous cell harvesting, processing and delivery technology that enables surgeons and clinicians to treat complicated skin defects, including chronic wounds, scars, burns, depigmentation, and aid in rejuvenation or reconstruction procedures that uses a patient s own skin cells to facilitate the regenerative process. Clinical experience generated by the company shows the system can be successfully used to promote healing and the formation of new skin structure after a severe injury, such as a burn or scald. Data also shows that ReCell can improve the appearance of acne scars, remove areas of discoloration and restore pigmentation in patients with vitiligo, and aid in the healing of chronic wounds such as venous leg ulcers and diabetic foot ulcers.

We like the system because it is simple, fast, safe, and effective. It s the ideal product, in our view, to treat major burns or scalds in children because the biopsy area is so small in comparison to split thickness meshed skin grafting (STSG), the current standard or care. A 1 cm2 biopsy with ReCell can treat a severe burn at up to 80 cm2, with wound re-epithelialization rates similar to the gold standard STSG. This is an enormous leap forward in our view considering covering a severe burn or scald at 80 cm2 with a STSG might require the biopsy area to be as large as 50 cm2. Plus, the ReCell procedure is less painful and offers superior pigmentation and patient satisfaction on follow-up. Avita is currently conducting a U.S.-based phase 3 / PMA trial (NCT01138917) with ReCell in acute burns and scalds, with data expected late 2014.

The chronic wound market remains the Holy Grail for Avita Medical. The market is large and growing rapidly as a result of the growing elderly and diabetic populations in the develop world. The market is dominated by negative pressure wound treatment, but things like advanced dressings and skin substitutes are coming on strong. Products like Shire s Dermagraft and Organogenesis Apligraf have sales exceeding $150 million worldwide. We think ReCell compares well with these products on a cost and effectiveness standpoint, especially considering the U.S. Center for Medicare and Medicaid Services (CMS) has recently proposed changes to the skin substitute policy to bundle payment of the graft and the procedure together. This would cap the reimbursement to the hospital $840 per procedure and potentially create a massive shift away from the too expensive Dermagraft and Apligraf products that both cost over $1,500 per procedure. ReCell costs between $800 and $1000 per procedure, and thus might become significantly advantaged compared to the two market leaders. In August 2013, the company recently initiated the RESTORE clinical trial (NCT01743053) studying ReCell vs. standard of care in patients with chronic venous leg ulcers. Top-line results from RESTORE are expected early 2015.

In Europe, ReCell has been granted CE Mark for the Intended to be used to disaggregate cells from a patient s split-thickness skin biopsy and to collect these cells for reintroduction to the patient. The cells can be used for autologous application to the prepared wound bed as determined by the physician. The company is currently conducting several post-market studies to help drive reimbursement in specific indications such as burns and scalds (NCT01138917), vitiligo (NCT01640678), scars (NCT01476826), and aesthetics / reconstruction. We note that Avita is also investing in product development, with a next-generation product in planning. This will allow for improved economics, including a razor / razor blade model, and potential increased uptake from the market.

Sales Opportunity

In the U.S., there are an estimated 250,000 emergency room visits each year for severe burns (source: National Fire Protection Association). Children under the age of five are 5-times more likely to have a severe burn than the general population. The majority of these burns are from non-firm contact burns or scalds. In roughly 20% of these cases, the patient will require admittance to the hospital for treatment. Standard of care, as noted above, is split-thickness meshed skin grafting. Avita's pivotal phase 3 trial noted above is designed to show non-inferiority to the standard of care, with secondary measures assessing potential superiority on measures of epithelialization, wound closure rates, pain, and appearance. In looking at the feasibility data and case study results, we are optimistic on the outcome of this pivotal trial.

Based on the simplicity of use, and the assumption that ReCell will achieve non-inferiority to split thickness meshed skin grafting on wound healing at the recipient site and superiority at the donor site, we believe the product can easily take 25% market share, with upside to as high as 40% market share based on the outcome of several key secondary endpoints, including pain, appearance, and patient satisfaction.

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Assuming an average cost per use at around $1,000 per treatment, we see ReCell as a potential $62.5 to $100 million opportunity in the U.S in burns and scalds alone. The opportunity in the rest of the developed world in burns and scalds easily eclipses another $100 million in our view.

Besides burns and scalds, we believe ReCell has meaningful potential to capture market share in acne scarring (25+ million Americans), vitiligo (~200,000 Americans), and aesthetic and/or reconstructive procedures (~1 million Americans). On a global basis, we see ReCell, conservatively, as a potential $250 million product. Approval for use in chronic wounds has the potential to double that peak sales number to $500+ million on a global basis.

Avita has a direct sales model in parts of Europe (two sales reps in the UK, one in France and one in Germany). In these countries, the company is working closely with a select group of influential surgeons and centers willing and able to serve as training and reference sites, conduct clinical and economic studies, present results in publications, congresses, case reports and white papers and support application of ReCell for reimbursement in each country. Reimbursement is the key to driving sales of the system in our view, so we are pleased to see the company tackling this issue head-on by partnering with key opinion leaders and fostering open communication on the device.

In other areas outside of Europe, such as China and Turkey, the company is partnering with distributors. The company currently has one major relationship in each country. These distributors provide a lower-cost alternative to direct channels, but at the cost of decreased margin, lack of control over performance, multiple non-aligned product sales and no direct customer contact. Distributors also require significant training and supervision, particularly for a disruptive product like ReCell. Still though, the opportunity to enter a market like China is too big to pass up for Avita. The company signed up a Chinese distributor in June 2012 that has completed 125 procedures to date. We expect Avita to seek additional distributor relationships and joint ventures around the world in the next several quarters. Key to these relationships will be watching for initial stocking orders and tracking the performance and sales milestones.

Is An Uplisting On The Horizon?

For a small biotech company with a market capitalization of only $39 million, Avita Medical is surprisingly well capitalized. The company held $10.6 million in cash and investments, and reported nearly $15 million in positive working capital and $10.5 million in positive shareholder equity as of June 30, 2013. We see the current cash position as sufficient to fund operations for the next four quarters.

The stock trades on both the Australian Securities Exchange (ASX) under the ticker symbol AVH and the OTCQX market under the ticker symbol AVMXY. The company reports financials according to International Financial Reporting Standards (IFRS). Full financial results are posted only twice a year (vs. quarterly for all U.S. NASDAQ & NYSE listed names). Some investors, including the bulk of institutional buyers, have an aversion to buying foreign-listed companies that trade on the U.S. OTC market, even if listed on the highest tier OTCQX. The average 3 month trading volume on the AVMXY listed stock is only 12,500 shares (up from 8,500 prior to our initiation in June 2013). We believe, given the OTC listing, IFRS reporting, and extremely low trading volume that it is difficult for a large institution to establish a core position in Avita Medical.

In this regard, we would like to see the company make an effort to move its listing to a major exchange in the U.S. The balance sheet and stock price qualifies the company for the NASDAQ-CM. This move would do wonders for the perception and credibility of the company, and in turn drive increased liquidity and institutional ownership. In the meantime, U.S. retail investors, amenable to the OTC listing and favorable on the story as we are have the advantage of being able to scoop up AVMXY shares on the cheap before the big institutions either take notice or are able to buy in. We have seen this scenario before (see: Organovo, Inc.). It s a very attractive opportunity for retail investors, assuming the company delivers on both the data and the listing.

Conclusion

The market capitalization at only $39 million is far too low and highly attractive for long-term investment in our view. Based on the projected sales opportunity of the ReCell device in potential indications such as burns and scalds, vitiligo, scars, and chronic wounds, we see the shares at meaningfully under-valued. We have built a discounted cash flow model to value the shares and arrive at a market capitalization of approximately $70 million. This equates to a target price of $4.00 per share. We believe the shares are set for a major re-valuation on the pending phase 3 / PMA data from the burns and scalds trial currently being conducted in the U.S. and the RESTORE study on leg ulcers being conducted in Europe, with data from both studies expected late 2014 / early 2015.

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PROJECTED FINANCIALS

Avita Medical Ltd Income Statement

Avita Medical, Ltd. FY 2012 Dec-12 Jun-13 FY 2013 Dec-13 Jun-14 FY 2014 FY 2015 FY 2016

Product Sales $3.352 $1.352 $1.463 $2.815 $1.500 $1.750 $3.250 $5.000 $10.000 YOY Growth 7.4% -21.3% -10.5% -16.0% -8.2% -47.8% 15.5% 53.8% 100.0%

Contracts / Collaborations / Grants $1.253 $0.520 $0.718 $1.237 $0.550 $0.700 $1.250 $1.250 $1.250 YOY Growth -3.6% -45.5% 139.9% -1.3% 83.9% -44.1% 1.0% 0.0% 0.0%

Total Revenues $4.606 $1.872 $2.180 $4.052 $2.050 $2.450 $4.500 $6.250 $11.250 YOY Growth 4.2% -29.9% 12.7% -12.0% 6.0% -46.8% 11.0% 38.9% 80.0%

Cost of Sales

$0.953 $0.357 $0.319 $0.677 $0.360 $0.420 $0.780 $1.200 $2.400 Product Gross Margin 71.6% 73.6% 78.2% 76.0% 76.0% 76.0% 76.0% 76.0% 76.0%

Research & Development

$0.969 $1.162 $1.439 $2.601 $1.400 $1.500 $2.900 $3.400 $4.000 Sales, Marketing, Admin

$8.443 $4.078 $4.845 $8.923 $4.650 $5.000 $9.650 $10.000 $11.000 Amortization Expense

$0.510 $0.073 $0 $0.073 $0.050 $0.050 $0.100 $0.100 $0.100 Finance / Other

$1.490 $0.000 $0.050 $0.000 $0.005 $0.005 $0.010 $0.010 $0.010

Pre-Tax Income ($7.759) ($3.798) ($4.473) ($8.221) ($4.415) ($4.525) ($8.940) ($8.460) ($6.260) Income Taxes

($0.088) $0.000 ($0.128) ($0.128) $0.000 ($0.150) ($0.150) ($0.150) ($0.110) Tax Rate 1.1% 0.0% 0.0% 1.6% 0.0% 0.0% 1.7% 1.8% 1.8%

Foreign Currency Adjustments

($0.009) $0.006 ($0.140) ($0.134) $0.000 $0.000 $0.000 $0.000 $0.000

Net Income ($7.662) ($3.805) ($4.205) ($7.959) ($4.415) ($4.375) ($8.790) ($8.310) ($6.150) Net Margin - - - - - - - - -

Reported EPS ($0.032) ($0.015) ($0.012) ($0.026) ($0.013) ($0.010) ($0.023) ($0.018) ($0.012) YOY Growth - - - - - - - - -

Weighted Ave. Share Count

238 258 343 301 350 425 388 450 500 Source: Zacks Investment Research, Inc. Jason Napodano, CFA

Zacks Investment Research Page 13 scr.zacks.com

Amarantus Bioscience, Inc. Balance Sheet

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