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Admedus Ltd: THE INVESTMENT CASE

Admedus has healthy mix of reliable Infusion earnings and strong revenue growth from ADAPT

The benefits of Admedus' proprietary ADAPT technology and products are now scientifically proven beyond doubt.
People working in a laboratory
INVESTMENT OVERVIEW: AHZ The Big Picture
With numerous catalysts on the horizon 2018 could be a watershed year for the company.

Admedus Ltd (ASX:AHZ) is reaping the benefits of an impressive year in terms of execution as it delivers on several key initiatives and invests in long-term sustainability.

The medical technologies group laid the foundation for what has been an exciting six-month period in which the company has gained regulatory approvals and launched its flagship products into new markets.

In bringing the market up to date with the company’s progress, Admedus chief executive officer Wayne Paterson said: “During the quarter, our research team continued to identify and test new product concepts with our advisory board doctors and medical engineers.

“The company now has a clear development pathway for 16 3D shaped collagen surgical solutions, making it unique in this space.”

Significant price drivers in 2017

However, there were also some game-changing developments that occurred in 2017 that tend to be forgotten despite the fact that they will be strong revenue drivers in the future.

The following share price chart maps these developments and also shows how challenging it can be as a smaller emerging company operating in the medical technology space.

This is important in terms of projecting how the company is likely to trade in 2018 in light of the step change in consistency of newsflow.

The 40% share price spike in April/May was triggered by FDA approval of the company’s CardioCel 3D.

Admedus traded as high as 43.5 cents on the day of the announcement, but despite the fact that this will be an ongoing revenue driver, investors lost interest in the company until November.

Ironically, it was CardioCel that once again was at the centre of this rerating.

Entry into India triggers 80% share price spike

The company received regulatory approval to launch the product in the $158 million Indian healthcare market where there is a huge need for the technology.

This news triggered an 80% share price rerating, and as the chart indicates the retracement was much more moderate.

However, of even more interest is the way the company has traded in 2018 with the weight of news flow driving substantial, but importantly, sustained share price momentum.

It appears that the company isn’t as prone to lulls in newsflow as it has been in the past.

This suggests acknowledgement that the company is not a speculative play but an emerging global group with predictable earnings and a highly scalable model.

2018 shapes up as a watershed year

With numerous catalysts on the horizon and much of the groundwork completed in 2017, this could be a watershed year for the company.

If the large peaks and troughs of 2017 are now behind Admedus the company could undergo a sustained share price rerating in 2018.

It is worth noting that only last Friday the company’s shares closed at 38 cents almost matching the May 2017 close of 38.5 cents, suggesting a breakout could be imminent.

 

 

To management’s credit, it has focused on developing a business with world-class technologies while also making some structural changes to enhance profitability.

It is this ‘get the business right and the share price will take care of itself’ mentality that invariably separates the long-term success stories from the one-hit wonders.

The progress made in improving the business over the last three years is now becoming evident in its financial performance as indicated below.

Proven technologies provide stability and growth

Admedus’ ADAPT and Infusion divisions are its two key revenue drivers.

Each division has different products and end markets, and it is important to understand their individual revenue models.

The Infusion division is relatively straightforward, providing a reliable source of revenue with anticipated organic growth of 13% forecast for 2018.

This division is the exclusive distributor of high-quality surgical infusion pumps and medical products into major Australian and New Zealand health centres.

It has a major supply contract with the new Royal Adelaide Hospital for more than 2,500 AcroMed infusion pumps.

Infusion is a steady earner, generating about $1 million in revenue per month.

It is the ideal foil for the more capital intensive, but higher-growth ADAPT division.

CardioCel is just the start

ADAPT will be the growth engine over the coming years as its established products such as CardioCel are rolled out into new regions and traction is gained in existing markets.

One only has to reflect on the growth momentum that has been achieved in some of Admedus’ more established regions to appreciate the upside in new markets.

This will be further advanced by an agreement that was negotiated in March which took effect from April 1, 2018.

Admedus now has an agreement with a group purchasing organisation covering more than 1,500 hospitals in the US.

This provides the network with access to ADAPT® tissue products, CardioCel® and VascuCel®.

ADAPT revenues to outstrip Infusion

Furthermore, Admedus has only scratched the surface in terms of addressing the wide-ranging applications for the underlying technology.

It is worth noting that ADAPT revenues are forecast to surpass Infusion revenues during 2018, resulting in higher gross margins for the group.

To gain an appreciation of the growth opportunities, one needs to understand the product.

First to ADAPT to new technologies

Admedus’ proprietary ADAPT® technology was invented by its vice president Cardiovascular Science, Professor Leon Neethling.

ADAPT treated tissue has been scientifically proven to more closely mimic the characteristics of normal human tissue which promotes a more tolerant immune response and improved tissue ingrowth.

ADAPT products are sold globally under the product names CardioCel®, CardioCel Neo®, CardioCel 3D®, and VascuCel®.

Revenues driven by high demand heart repair market

Primarily used in restorative structural heart repair and reconstruction, ADAPT® biomaterial scaffolds offer superior resistance to calcification with more than nine years of clinical evidence showing no degradation or calcification.

Not only is this an outstanding achievement in isolation, but it represents proven clinical data that can be acknowledged when using the technology in developing other applications.

Management sees the potential of this technology as almost beyond measure, as it constantly looks to evolve its purpose and application.

All Admedus ADAPT® products are manufactured in, and distributed from, the company’s state-of-the-art biomanufacturing facility.

TAVR demonstrates ability to enter new markets

In October, Admedus submitted IP (intellectual property) applications relating to the development of a new Transcatheter Aortic Valve Replacement (TAVR) device.

The two separate pending patent applications in the US related to the development and manufacture of a three-dimensional replacement heart valve.

This involved the adoption of Admedus’ ADAPT technology that requires minimal suturing and a hydro-packaging system that revolutionises the way TAVR products are assembled and distributed.

It marked the beginning of Admedus’ entry into the $3 billion global TAVR market, which is projected to grow to $5 billion by 2020.

Alternative treatment for heart surgery

TAVR offers an alternative treatment option for patients who are unsuitable candidates for surgical heart valve replacement or repair.

Highlighting the ground-breaking nature of this development, Paterson said: “The benefits of our proprietary ADAPT technology and products are now scientifically proven beyond doubt.

“With published evidence of our durability, and clinically important remodelling and anti-calcification properties and more than nine years of data behind us, we are in a strong competitive position.”

This is reflected in the robust growth projections provided by management which importantly don’t take into account products requiring full registration such as TAVR.

Holistic product offering

While the TAVR breakthrough was crucial in its own right, the implications for Admedus are far-reaching, making them important to understand for potential long-term investors.

The combination of the 3D valve, hydro-packaging and ADAPT technology ensures the Admedus TAVR is far superior to any of its competitors.

Furthermore, it is less expensive to produce, more efficient to use and offers greater health benefits to patients.

Admedus will not only have unique IP around its valve, but also up and down the catheter making it a holistic product that offers high-value opportunities in the future.

The timing couldn’t be better as the company enters an era where the likes of CardioCel 3D as well as one-piece moulded valves will meet physicians and patient’s unmet needs.

Evolving engineering capabilities

In April, the company submitted several new provisional IP applications in the US for further development of the TAVR device.

These relate to three components that have been designed to complement the Admedus single piece moulded valve.

They will address issues in the areas of access site vascular injury, valve positioning and placement, and paravalvular leakage (PVL).

Paterson said: “These new innovations are beyond our tissue science and are based on feedback from the leading physicians who form our permanent TAVR Advisory board.

“Admedus’ TAVR project is an exciting opportunity to highlight our growing confidence and expertise as a credible and bankable medical technology company with evolving engineering capabilities, beyond our world-leading tissue engineering skills.”

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