Shares in medical technology companies have been an iffy investment over the past two years. Cuts in medical spending and patients reining back on non-essential items has meant a serious underperformance in relation to the pharmaceuticals sector, where percentage gains were in double digits in 2011. Yet Advanced Medical Solutions (AMS) stands out - it can point to both measurable returns and a promising future selling liquid medical sealants to stitch up the recently sliced.
- RESORBA boost New market opportunities Financially sound Potential takeover target
- Product competition Crimped healthcare budgets
A major part of that future will be determined by its acquisition of German wound-care specialist RESORBA in December, for which AMS raised £34m in new equity. Including debt, the total price tag is about £55m, so much is at stake. But AMS's bosses reckon RESORBA will give the company the ability to fend off bigger rivals seeking to undercut it by adding new markets in central and eastern Europe, as well as extra products for its sales force. RESORBA also brings significantly higher profit margins than AMS currently manages, which is why earnings should rise rapidly in 2012 (see table).
ADVANCED MEDICAL SOLUTIONS | ||||
|---|---|---|---|---|
| ORD PRICE: | 88p | MARKET VALUE: | £179m | |
| TOUCH: | 87-88p | 12-MONTH HIGH: | 96p | LOW: 63p |
| DIVIDEND YIELD: | 0.8% | PE RATIO: | 18 | |
| NET ASSET VALUE: | See text | NET CASH: | See text | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 20.3 | 2.93 | 2.31 | nil |
| 2009 | 24.1 | 2.39 | 1.93 | nil |
| 2010 | 31.9 | 4.29 | 3.17 | 0.38 |
| 2011* | 34.6 | 4.20 | 4.00 | 0.50 |
| 2012* | 58.3 | 12.3 | 5.10 | 0.70 |
| % change | +68 | +193 | +28 | +40 |
Normal market share: 10,000 Matched bargain trading Beta: 0.6 *Seymour Pierce forecasts (profits and earnings are not comparable with historic figures) | ||||
The big unknown is the response of giant US healthcare specialist Johnson & Johnson to the challenge of AMS's Liquiband in the US market, which it dominates with its Unibond product. The likelihood is that the US company will up its game with offers of discounts and extra marketing. The rapid change in fortunes of UK-based health-testing specialist Immunodiagnostics shows that big players can and will squeeze new competitors by introducing products or using the sheer weight of their contracts to slow down sales momentum. The acid test for AMS will be generating enough diversity in the source of its revenues to overcome a squeeze in any one market and the RESORBA deal is vital to achieving this.
AMS will be helped by its financial strength. Net debt will rise to about £19m this year, representing balance sheet gearing of 31 per cent, according to broker Seymour Pierce. But AMS will generate enough cash to more than halve its net debt to about £9m by 2013, Seymour Pierce's analysts also reckon. That will allow it to add acquisitions and invest in its existing products.
The other risks are largely beyond management's control as there are few clues as to the direction healthcare spending will take this year. The consensus is that budgets will be squeezed as cash-strapped European governments force down the prices they will pay. That could affect RESORBA, but AMS's products are generally used for critical care so should not be affected by the voluntary decisions for elective surgery that, for example, can bedevil the likes of Smith & Nephew.
