WHAT do silver and super-glue have in common?
No idea? Well, the answer is they are the cornerstones of growth for wound-care company Advanced Medical Solutions (LON:AMS).
Silver is the infection retarding agent the company uses in the SilverCel range of dressings, while it also produces and sells super-glue. But not the type you might use to fix broken crockery.
Instead it is the sort of adhesive that instantly knits cuts back together and is marketed as LiquiBand.
But let’s back up a little and find out exactly what AMS does.
It’s in the market for advanced wound-care – so not the bog-standard bandages and plasters you might find in the first aid kit.
Mainly its products are used for chronic wounds, which might have become infected and require a special dressing.
Its range divides into two categories - foams and fibres - which are sold through a network of major suppliers.
However it also has a budget brand which it distributes through private label partners and markets direct to the NHS. We’ll hear more about this later.
AMS has a small bite of the advanced wound-care market, which is conservatively estimated to be worth US$3.6 billion and which is currently dominated by a handful of bigger players.
It means the group sits under the radar of industry giants such as Smith & Nephew, Systagenix and ConvaTec, which allows it to nibble away at the trio’s slice of the cake.
The intellectual property that makes its dressings stand out in the marketplace is protected by around 70 separate patents, while the group is able to refresh the offering thanks to a keen focus on research and development.
The recent interim results, meanwhile, show the group is expanding at quite a rate of knots.
Revenues advanced by 47 per cent year-on-year to £14.5 million in the six months to June 30, or 25 per cent if the contribution of Corpura, the recently acquired foams business, is excluded.
Pre-exceptional profits grew 136 per cent to £2.1 million, while AMS generated £1.4 million of cash in the period.
And unlike many of the small and growing firms in the healthcare sector it is even pledging to pay a dividend.
The plan is to hand over 10 per cent of post tax earnings initially and then progressively grow the payout after that.
“We are still very much a capital growth stock,” says Dr Don Evans, chief executive.
“But we do believe paying a dividend is a good discipline.
“We have a very good institutional, private client and retail investor base. And even the institutions think paying a dividend is a good thing. It shows we have grown up.”
Investec predicts pre-tax profits this year will hit £5.1 million this year and advance to £6.3 million in 2011.
Over the past five years it has built a 20 per cent market share in silver products, sold through Systagenix and other partners, and AMS wants to build on this number two position.
“We can continue to grow share,” says Evans.
Meanwhile, the acquisition of the outstanding 50.6 per cent stake in Dutch company Corpura a year ago gives it a very strong position in the market for foam dressings and a platform on which to challenge the opposition. “The integration has gone very well,” Evans confirms.
He holds out high hopes for LiquiBand, the super-glue, whose launch in the US could transform the company’s sales and earnings profile.
It is up against Dermabond, made by a J&J company, which accounts for 90 per cent of all glues sold.
Evans says the group will go in with a faster setting, slightly cheaper product.
The revenue split with partners Cardinal Healthcare and McKesson provides the sales staff and the respective companies with a very good incentive to promote LiquiBand to hospitals and doctors’ offices.
The hope is to build an around 20 per cent share of the £155 million-a-year glues market, establishing the same sort of base it has created for other products.
“We have been beavering away in the UK and Europe with LiquiBand,” Evans says. "But we clearly want to get into the US."
“We have taken the past three years to work through the regulatory process, which has been quite tortuous. But we got there. And we are taking two products in the US market.
“If we can do a good job with our products we can really penetrate the market.”
Another growth channel is the budget range – ActivHeal - which plays directly to cost-constrained healthcare providers such as NHS trusts.
“The products do the job technically of their big branded equivalents, but offer a big saving – typically 40 per cent,” says Evans.
“So we can go to an NHS trust and they are spending a certain amount of their budget on advanced wound care. So for routine wounds, straightforward wounds we can offer theme a range that does the job and saves them a chunk of money.
“Then if it is a difficult wound, an infected wound they can then afford the higher value products.
“That message is resonating very well at the moment because of the pressure on the NHS. The problem is there’s not central decision-making so you have to do it trust by trust.
“It is an incremental build. That business was up 20 per cent in the first half. But we are only in half the NHS trusts at the minute.”
Recently the group has moved into one single facility at Winsford in the north west, which has the potential to treble the firm’s capacity – giving a measure of Evans’ ambition.
The chief executive also believes he can deliver operational benefits from the new site that ought to drop to the bottom line. And with £24m off- balance sheet tax losses AMS is not expecting to pay tax for a few years yet.
The capital spending programme, the payment of a dividend and expenditure on R&D still leaves the company with enough cash to fund bolt-one acquisitions.
However, if Evans and his team want to do something more ambitious they will have to return to the market for additional funding, the chief executive admits.
“We have got options. But we have enough to drive the organic business,” he adds.
“But we are mindful of the opportunities. We have a strong organic story, we don’t need to do M& but it is the classic case that if we see something that is a good strategic fit and accelerates growth, we will do it.”
AMS At a Glance
TICKER LON:AMS
Market Cap: £100 million
Sector: Healthcare (advanced wound-care)
Employs 240 people in Winsford, Plymouth and the Netherlands
Latest results: H1 2010 pre-tax profits of £2.1 million, up 136 per cent