Visits to England’s A&E departments dropped by more than a half in April, and were still down by 30 per cent in July. Meanwhile, Covid-19 has caused millions of elective surgeries to be cancelled worldwide.
Portfolio of proprietary medical brands
Continued investment in R&D
Should return to growth post-pandemic
Large market opportunity
Badly hit by pandemic disruption
Such a hiatus in routine healthcare activity could prove catastrophic for would-be patients. But it has also been bad news for companies supplying the equipment used in non-virus-related procedures – including Aim-traded Advanced Medical Solutions (AMS). Shares in the provider of surgical products and wound dressings have dropped by 30 per cent since January, amid ebbing revenues and broker downgrades.
2019 wasn’t exactly a golden year for AMS either. Performance was dampened by weaker US demand for the group’s ‘Liquiband’ surgical glue, amid rising competition and destocking. And, rubbing salt into the wound, a third-party device-sterilisation partner suffered a failure in November – hitting AMS’s order-count. Chasing sales in the US has also required the company to offer more favourable credit terms over recent years, with its debtors-to-sales coming in at 29 per cent last year, adding to the risks of a trading slowdown.
However, the challenges faced by AMS are, arguably, temporary. In the longer term, the group has attractive attributes that should help it to stand the test of the crisis – meaning that its stock may be undervalued at current prices.
AMS comprises a diversified portfolio of proprietary brands – spanning technologies from tissue adhesives, to collagen, to sutures. Moreover, the group continues to enhance that portfolio via a focus on research and development (R&D). Indeed, R&D investment climbed from 3.7 per cent of revenues in 2015 to 6.3 per cent last year. Signalling commercial progress on its innovation strategy, the proportion of sales from new products rose from 11.2 per cent to 23.6 per cent over the same time frame.
And two recent acquisitions should bolster future trading. Sealantis, bought for $25m (£19m) in January 2019, expands AMS’s internal sealants R&D pipeline. Biomatlante – bought for €8m (£7.2m) in November – opens the doors to synthetic bone substitutes. Together, these deals have enlarged AMS’s addressable market from £8.5bn to £10.8bn.
AMS has been protecting its products from competitors as it goes – with more than 30 “patent families” (collections) at last count. Just this month, it was granted UK and US patents for its ‘LiquiBand Exceed’ range. Encouragingly, management noted in the same breath that LiquiBand was seeing early signs of Stateside recovery.
Stricter regulation can also help to sort the wheat from the chaff, and AMS has been recertifying its products ahead of Europe’s new medical device rules. Compliance will amplify costs, but the group is primed to exploit opportunities created.
Notwithstanding such expenses, the adjusted operating margin has remained broadly consistent in recent years at 26-28 per cent – helped by a focus on reducing costs while increasing capacity.
|Advanced Medical Solutions (AMS)|
|ORD PRICE:||215p||MARKET VALUE:||£461m|
|FORWARD DIVIDEND YIELD:||0.9%||FORWARD PE RATIO:||27|
|NET ASSET VALUE:||89.2p*||NET CASH:||£54.4m**|
|Year to 31 Dec||Turnover (£m)||Pre-tax profit (£m)***||Earnings per share (p)***||Dividend per share (p)|
|*Includes intangible assets of £87m, or 40.5p a share|
|**Includes lease liabilities of £9.7m|
|***Panmure Gordon forecasts, adjusted PTP and EPS figures|