Wound treatment developer Advanced Medical Solutions (AMS) has seen its share price more than triple in three years – but new investors shouldn’t think they’ve missed the boat as there should be plenty more to come. Oliver Haill reports

Profitable since 2005, as its products began to gain acceptance in the market, the prospects of Cheshire-based Advanced Medical Solutions (AMS), which develops treatments for chronic wounds, are poised to accelerate on a number of fronts in the coming years, with growth prospects looking healthy in a $15 billion global wound-care market.

The treatment of chronic wounds – including bed sores, post-operative surgical wounds, second-degree burns and ulcers – nowadays involves highly specialist, niche products. AMS is an expert in the ‘moist healing’ process, whereby natural and synthetic chemicals are used to create the moist environment that has been proven to promote faster healing, less infection and less scarring than traditional dry healing.

Founded in 1991 to develop polymers for this corner of the healthcare market, AMS acquired a second business line – wound closures – soon after and floated on the Official List in the mid 1990s. In the period since, the company has broadened its range of products across the full gamut of advanced wound-care technologies and claims to be a one-stop shop, offering anything from foams to ‘silver alginate’.

AMS offers investors fast growth in an advanced wound-care market that is currently worth $2.6 billion globally and is itself growing at 8.9 per cent a year. Furthermore, in the even bigger wound closure market, AMS has the UK’s market-leading product used in accident and emergency wards. This is a tissue adhesive for closing wounds – ‘super-gluing’ cuts together, in essence – known as Liquiband, which is expected to grab a healthy portion of the US market when it receives regulatory approval later this year.

Strategy
A technology company with its own research and development and manufacturing capabilities, AMS has overcome the perennial problem facing such smaller concerns – namely getting their wares to market – by partnering with larger players and supplying them on a ‘white label’ basis.

‘Only a few companies do what we do,’ explains chief executive Don Evans, ‘especially in terms of offering a full range. So, we supply a number of companies as partners; they make some products themselves, and we fill in the gaps.’ Working with partners is also essential if the market needs education, since a big brand name can give a new product gravitas.

Supplementing white labelling is the company’s own private label range, called ActivHeal, through which it provides the same products but at a cheaper price, offering substantial savings for bulk buyers such as the NHS. Direct sales of ActivHeal to the NHS have built steadily over the past few years, and the number of NHS trust customers more than doubled to over a hundred last year.

Recent interim results to June, showing progress across the business, revealed 57 per cent growth in ActivHeal sales, contributing to 28 per cent sales growth to over £8 million in the wound-care division. Split geographically, revenues from the US provided a quarter of the total, with Europe and the UK contributing roughly a third each. Group gross margins expanded from 43 per cent to 47 per cent and pre-tax profits by 80 per cent to £1.2 million.

Worth mentioning is that sales of silver and silver alginates grew 30 per cent in the half-year, outstripping 20 per cent growth in a £300 million market. Evans, who stresses that ‘we’ve got a very strong position in silver’, hopes to capitalise on the momentum in this area.

Silver is one of the oldest known antimicrobials, or bacteria-killers, while alginates are dressings that absorb excess fluid exuded into the wound by surrounding tissue, as well as helping to stem bleeding. In the age of medicine-resistant superbugs, the fact that silver remains resistant to bacterial mutations is behind a strong recent trend towards its inclusion in medical dressings. This factor has proved a powerful growth driver in the past year, especially since AMS has two silver technologies, sold globally through a number of marketing and distribution partners. Moreover, one of the group’s silver-containing wound gels received regulatory approval in the US, providing a further shot in the arm for growth potential.

Evans recently strengthened another aspect of the business in the wound-care portfolio via April’s acquisition of a 49 per cent stake in Corpura, a Dutch venture focused on foam dressings. Foams represent the fastest-growing segment of advanced wound-care, and Evans suggests that Corpura’s technology provides an additional platform for delivering some of the new technologies being developed at its in-house R&D laboratories. He sees the acquisition making its first impact in terms of sales in the second half of the year.

Management
Gaining his doctorate in biomedical engineering at the University of Toronto, Australian native Dr Don Evans earned his spurs in the sector with a 19-year stint at the UK arm of healthcare products behemoth Johnson & Johnson.

He left his position as vice-president of European Operations for Johnson & Johnson Professional in 1997 to become AMS’s operations director, before promotion to managing director of the advanced wound-care division followed in 1999, and to group chief executive in 2000.

Venture capitalist Dr Geoffrey Vernon, a former executive at Rothschild Asset Management, brings extensive City know-how to the business in his role as chairman. Furthermore, he has over 20 years’ experience in healthcare and life sciences, having held senior roles at Schering and Ciba-Geigy and run the life sciences department as a partner of venture capital group Advent.

Balancing the company’s books for almost a decade now has been finance director Mary Tavener, doubtless one of the only qualified accountants with a degree in chemistry from Oxford. She brings a wealth of experience in corporate activity from her years as financial controller of chemicals concern BTP, which effected a number of acquisitions and disposals during her time.

Non-executive directors Stephen Harris, formerly of prescription and consumer healthcare companies MSD, Lilly, Boots and Reckitt & Colman, and Stephen Bellamy, another venture capitalist and chairman of the Close Technology Fund, bring additional grey matter to the board.

Prospects
Wound-care and closure offer AMS prime growth prospects. An ageing and increasingly obese population, certainly in the UK and US, will continue to drive the size of the markets. Moreover, many of the techniques of advanced wound-care and closure are still on the leading edge, meaning large parts of the global market remain still oblivious to their benefits.

Domestic sales to the NHS are an example. In June, AMS’s full range was included in the new cross-NHS framework buying agreement, which means all NHS trusts are more inclined than ever to choose them. ‘Direct sales to the NHS are starting to build momentum,’ says Evans. ‘There are 800 NHS trusts, and so far we’ve got just over 100 of them. We only started a couple of years ago, so it’s still very early days.’

Augmenting this range over the coming years will be new applications of AMS’s proprietary technology, such as a combination of its expertise in silver and Corpura’s in foam. Meanwhile, its R&D arm continues to work on projects addressing either new market opportunities or unmet clinical needs.

Acquisitions also offer potential to turbo-charge prospects, with Evans perpetually ‘evaluating certain technologies’ and businesses that bring distribution and direct marketing capabilities likely to prove attractive.

However, management and analysts alike believe the next big kicker will be the imminent US launch of the LiquiBand wound closure range. The regulatory green light is expected this year, with sales via local distribution partners expected to build in 2009. Says Evans: ‘This is a step change on the horizon.’ The US market, accounting for $170 million of a $200 million global market, is growing at 15 per cent a year and, despite his former employer Johnson & Johnson’s Dermaband being the dominant product there, Evans thinks LiquiBand holds a number of advantages.

Backing up his argument is the fact that LiquiBand has already done very well against Dermaband in Europe. In the UK, for instance, it is the leading product used in hospital accident and emergency departments, with a claimed 70 per cent market share. ‘Johnson & Johnson has created the market for adhesives in the US. The opportunity for us is to look at substituting some of that and also converting more of the market.’

From an operational point of view, a restructuring of AMS’s two manufacturing facilities into one new leased facility is expected to drive efficiencies and boost future margins. The rationalisation process is expected to cost around £4 million in 2009 and 2010, but should be funded by internal cash flows.

Valuation
Debuting on AIM at a lowly 8.5p in 2002, after topping £3 during its time on the main market, shares in AMS have slowly but surely been nursed back to their current 34p level. At the present price, and based on consensus City estimates from three brokers – the house broker Landsbanki as well as Arden and Oriel – the shares are trading on 18.9 times this year’s estimated earnings. That rating drops to 14.8, based on the 2.3p consensus earnings figure, for 2009, almost half the sector’s average.

The most conservative forecast, from Oriel’s Mike Mitchell, foretells profits of £2.3 million and earnings of 1.8p for the full year, from £19.4 million sales. For 2009, Mitchell predicts £22.3 million sales, £2.8 million of profit and 2.1p of earnings, although he notes the opportunity for upgrades going forwards based on the Liquiband launch.

Strongly cash generative, AMS possesses a healthy balance sheet, on which, even after the purchase of the stake in Corpura, sat half-time net cash balances of £5.4 million, up from £5 million a year earlier. AMS has only a small amount of debt, from a mortgage on one site.

Overall, the investment case of AMS is compelling, given the group’s potential for continued growth and upcoming boosts to the price from regulatory approvals, potential acquisitions and improving results. Moreover, having been a takeover target before, it is certainly on the radar of many larger companies too.  

Advanced Medical Solutions	AIM	£46.24m	32.25p	0.00p
Click here for interactive charting
Other company articles:
Silver lining at AMS			06/10/2008
Fund Manager Focus by Jenny Lowe			30/06/2008
Gall & Eke Corporate Partners			30/05/2007
Woundcare group on the prowl			13/03/2007
Woundcare group signals profitability			12/12/2006