Updated: Mar 4
Advanced Medical Solutions is a small medical devices firm based in the North of England. Its primary lines of business are in the surgical and wound closure markets, with products ranging from tissue adhesives and internal fixtures (used in surgical procedures) to foams and dressings for wound care. AMS sells its products directly in European markets and has a distribution network for further geographies. The coronavirus has had a notable impact on the business as many surgeries are either elective (people can choose when to have them) or are as a result of injuries incurred in the workplace or due to sporting activities — both have been reduced this past year with people kept indoors due to the virus.
In 2019, AMS’ products delivered £102m in global revenue. AMS is split into two halves, the Surgical business unit and the Woundcare business unit. £56.5 million was derived from the Surgical side of the business, which is split into a further three segments: ‘Advanced Closure’, ‘Traditional Closure’ and ‘Biosurgicals’. Within these segments, the key brands are:
LiquiBand: an ‘Advanced Closure’ brand that has a range of products that are used as skin adhesives after surgical procedures.
Resorba: a brand that crosses both ‘Traditional Closure’ with suture products (stitches) and ‘Biosurgical’ collagen products that help bone growth and tissue repair after general and dental surgery.
The other half of the business is the Woundcare business unit, which is split into two main segments: ‘Infection Management’, with antimicrobial wound dressings and ‘Exudate Management’, with its main brand ActivHeal — a simple wound care product solution, provided largely to the NHS.
Surgical Business Uni
In terms of recent performance, the coronavirus has had a significant impact on both halves of the business. At the half-year point in 2020, revenue was down 19% in total, with a pretty equal reduction in performance for both Surgical and Woundcare. The worst performances came from the following business lines: ‘Advanced Closure’ (down 36%), ‘Exudate Management’ (down 29%) and ‘Infection Management’ (down 23%). This performance was somewhat offset by results from the product lines of ‘Biosurgicals’ (up 19%) and ‘Other Wound Care’ (up 23%). The ‘Biosurgicals’ growth is largely due to the contribution from the recent acquisition of Biomatlante in November 2019. The ‘Other Wound Care’ segment enjoyed a good performance in H1 2020 due to large royalty payments from a US-based licensee Organogenesis. Stripping out the recent acquisitions, performance in the first half of 2020 was pretty dire, but this kind of result is expected from a company that relies on hospital surgery rooms at full capacity.
Full-year results for 2019 show the operational state that the business entered the pandemic in. Overall results in 2019 delivered a small decline in revenue compared to 2018, with the Surgical business unit delivering -1% due to its heavy weighting towards ‘Advanced Closure’ products under the LiquiBand brand. ‘Advanced Closure’ itself was down 10% in 2019, mainly due to lost accounts in the US. All other segments in the Surgical business unit delivered good growth, however, they do not contribute a large enough portion of revenues to offset the poor performance of LiquiBand. Over in Woundcare, another muted -1% performance was derived from a mixed bag result in each segment, dragged down further by the ‘Exudate Management’ segment.
So, to summarise recent performance:
Coronavirus has hampered H1 2020 performance in all product lines, likely continuing for the full year.
2019 showed flat performance vs 2018, largely due to a decline in the largest business segment ‘Advanced Closure’ (LiquiBand).
Particular bright spots in the business can be found in the ‘Biosurgicals’ segment, where collagen boosters and other products acquired from Biomatlante are delivering growth, alongside the ‘Other Wound Care’ segment, with strong royalties from Organogenesis.
So, what can we expect from post-2021? I think as investors, all eyes have to be on the ‘Advanced Closure’ segment. The LiquiBand products are the largest revenue contributor to AMS’ revenue, and until recently have been delivering good growth. Even in 2019, growth was present in all geographies except the US, which unfortunately for AMS is the largest contributor to the segment. The main reason for the poor performance was due to de-stocking after losing the business of two large purchasing organisations in the US. This was not great news, but as you would expect, this was a key focus area for the business to reinvigorate in the year 2020.
However, at the half-year 2020, there was no mention of winning back those two large key accounts, and I believe AMS may encounter some difficulties re-igniting this growth due to the structure of AMS’ business. Firstly, AMS is a small player in a very large and competitive marketplace. Global medical device heavyweights operate in the segment, with companies such as Smith and Nephew, Baxter, and Johnson and Johnson, which all have significantly higher marketing budgets than AMS. The sheer size of some of AMS’ competition could make it difficult for it to gain market share. Secondly, AMS’ route to market. Being a small UK company, it does not sell directly into US markets, it relies instead on a network of distributors (the saying, ‘If you want something done, you’ve got to do it yourself’ immediately springs to mind here!). Going up against bigger players without a centrally managed salesforce in this industry is tough, and could be the reason behind the large loss of accounts in 2019. For these reasons, unless new LiquiBand product launches make serious headway, I would expect the sluggish performance in AMS’ core product line to continue.
(I have excluded AMS’ 2021 and 2022 estimates for revenue and profit from the table above. As AMS is a business that is susceptible to national lockdowns and the re-opening of public facilities, accurately estimating the business performance in 2021 is difficult. I would expect that the business won’t fully return to growth until 2022/23.)
Looking at the business through the lens of its recent performance, we can extrapolate a few things. Firstly, as already highlighted from the underlying operations, the company has struggled for growth over the last few years. Revenues have stalled at the high of £102 million in 2018, and operating profit has remained below the 2018 high of £28.8 million. Even in 2021, revenue and profits are unlikely to exceed the 2018 high, thus, in the last five years, there will have been no underlying growth for the business. Growth aside, the business is very profitable, with operating margins typically around 27%. This is likely derived from AMS’ quality products and patents that protect them, allowing for a price premium that flows through to operating profits. AMS has a reasonable return on capital employed (ROCE) of around 15%, which has steadily declined through recent years as the company makes more acquisitions. The company has a solid balance sheet with a sizable net cash position — currently around 12% of AMS’ market cap. In summary, albeit struggling for growth, the financials paint the picture of a solid, financially well-run company.
In terms of valuation, today’s price of 235p is around 60 times 2020 earnings estimates. Looking to a year (estimated 2022/2023) where coronavirus abates and elective surgery returns to prior levels, AMS will probably land somewhere between its 2018 and 2019 earnings — for ease, we can call this an EPS of 10p. That gives us 23x forward earnings and, adjusting for the £67 million net cash on the balance sheet, a forward P/E of 20. If AMS’ core business was performing strongly prior to the onset of the pandemic, I would think this was a reasonable price to pay — not cheap, but a fair price. However, with a poor performance in 2019, a fairly challenging competitive landscape and the added impact of reduced elective surgeries to continue into 2021, I would not consider AMS for an investment at this price. AMS is certainly very profitable and has solid financial metrics. However, growth must be seen in order to justify such a premium in comparison to the average company on the market.