Developing new products and achieving new sales can be a lengthy process for any growth company – particularly those in the healthcare sector. This means that investors often need to be extremely patient.

A perfect example is Advanced Medical Solutions, a woundcare and wound closure product developer that has been around for years without ever producing much in the way of profits or earnings. According to management, this could be about to change.

Of course, cynical investors may not be moved much by such noises – after all, AMS has been talking about moving into profit for most of this decade and although it has made progress – in terms of both sales and product developments – it has been slower than hoped.

Nevertheless, the outlook for the business is good. Its markets are forecast to grow by 15 per cent a year until the end of the decade as hospitals switch to newer products.  

Cash and product rich

Unlike many developers of technology or medical solutions there is no danger of AMS running out of money in the short term. It has a strong balance sheet with £2.9 million in cash and it won’t need any more unless it makes an acquisition. In fact if, as expected, AMS starts to generate profits, the cash pile should actually rise.

Corporate Synergy estimates that more than £50 million has been invested in developing AMS’ products. The newest woundcare technology is based on silver alginate. Silver is an antimicrobial that helps prevent infection. This is combined with alginate that is derived from seaweed. Other technology being developed includes hydrocolloid dressings, which absorb fluid from the wound.

The main wound closure offering is Liquiband, a tissue adhesive used to close trauma and surgical wounds. It is used in the majority of hospital accident and emergency departments in the UK, and has significant benefits over rivals and traditional stitching.

Direct to market

Historically AMS has sold its products through licensing them to branded healthcare companies such as Johnson & Johnson, Smith & Nephew and Baxter, or through distributors.

In the UK it is now supplying the NHS directly using its ActivHeal brand. Case studies show that this can save the NHS 40 per cent of its budget in certain areas (indeed, a value range is available to hospitals and primary care trusts). There was a slow start to sales because of budgetary restrictions early last year but sales should now start to build.

AMS made a small profit in the second quarter of 2005 but still reported a first half loss of £407,000 on sales of £5.86 million. The second half will have been profitable so the full year loss will be lower.

America and Japan beckon

At the moment the vast majority of sales are in Europe, but management hopes that Liquiband will receive US regulatory approval in 2007 (AMS has signed up a partner which is funding clinical studies in the States). The US is the single biggest market for the tissue adhesive and the fact that it has been proven in Europe is certainly a professional and commercial plus.

Elsewhere, AMS is linking up with Nitto Medical Corporation in order to break into the Japanese market. It is six months into the regulatory approval process for one product and four more potential products have been identified. The first product should be on sale later this year and the others could be on the market in 2006 or 2007.

House broker Bridgewell forecasts pre-tax profits of £380,000 for 2006. According to Corporate Synergy profits could rise as high as £800,000 in 2007. As AMS has around £10 million of tax losses, it won’t be paying tax for a long time. Forecast earnings per share are dependent on the tax credit. Based on Corporate Synergy’s estimated tax credit of £500,000, the shares are trading on ten times 2007 estimates.

Those who back the company now will be buying into a firm with a much broader commercial base than many years ago.