Analysts downgrade forecasts in Cheshire woundcare group after profit warning

Chris Meredith

Analysts have downgraded their forecasts for Cheshire woundcare specialist Advanced Medical Solutions (AMS) and its shares have fallen by more than 25% in morning trading.

It followed an unscheduled trading update from the Winsford-based business which included a profit warning for its annual results in the year ending December 31, 2023.

As reported in its July trading update, the company said its first half was impacted by reduced royalty income from the patent licencing agreement with Organogenesis Inc that ends in September 2026.

More recently, in August 2023, Organogenesis announced that changes to US reimbursement coverage for the treatment of diabetic foot ulcers and venous leg ulcers has created uncertainty regarding the revenue outlook for some of its key products, including those utilising AMS patents.

Given that Organogenesis has withdrawn its own guidance and that AMS has no control of, and minimal insight into its sales, the company said it is unable to quantify the financial impact on its business at this stage.

In a stock exchange notice it said: “We, therefore, believe it to be prudent to remove this royalty in its entirety from Q4 2023 guidance onwards.”

It said the total 2023 full year impact of the lower royalty is expected to be a reduction of £2m to adjusted pre-tax profit. In FY24 and FY25, the removal of the royalty is expected to reduce adjusted pre-tax profit by £4m per annum with a similar pro-rata impact in FY26 until the end of the agreement in September 2026.

The company added that, as part of its enhanced partner strategy in the US announced in March, it has had positive discussions with its partners and has made good progress with new agreements aimed at delivering stronger growth from early 2024 onwards, but it added that this process has taken longer than first anticipated and associated destocking has been greater and it is clear that the FY23 impact will be more significant than previously estimated, impacting revenues just in the current year.

It said the destocking has not affected LiquiBand end sales demand and the pipeline of evaluations and conversions for LiquiBand XL continues to grow strongly. As such the board’s expectations for LiquiBand growth remain high, both short and long term and LiquiBand sales forecasts for 2024 and future years remain unchanged.

AMS said the combined effect of these factors is expected to impact the group’s FY23 financial performance with revenues now anticipated to be approximately £124-£127m and adjusted pre-tax profit of approximately £25-£27m.

It said, reflecting the board’s confidence, with the exception of the adjustment to the Organogenesis royalty, guidance for future years remains unchanged.

Further information will be provided when AMS announces its interim results on September 20.

Chief executive, Chris Meredith, said: “While the uncertainty in the Organogenesis royalty stream and the higher de-stocking of US LiquiBand is clearly disappointing, my confidence in AMS’s long term growth prospects is stronger than ever.

“We remain convinced that our new US LiquiBand partner strategy will drive accelerated growth from early 2024 and that this, in conjunction with other initiatives such as the imminent launch of LiquiBand Fix8 in the US, will enable AMS to return to strong growth in 2024 and beyond.”

Following the announcement, Dr Mike Mitchell and Dr Julie Simmonds, analysts with investment bank Panmure Gordon, said: “This morning AMS has issued an unscheduled trading update highlighting two issues which prompt us to revise forecasts downwards.

“Recent commentary from Organogenesis on changes to US reimbursement coverage for the treatment of diabetic foot ulcers and venous leg ulcers has created uncertainty on revenue expectations for some of its key products, including those utilising AMS patents, undermining expectations for Organogensis-related royalty streams.

“Meanwhile, destocking on US LiquiBand – while the company makes ‘good’ but slower progress on its partnering relationships – will see an impact which AMS considers to be limited to FY23.

“The upshot? A disappointing turn of events but ones which do not, in our view, undermine the longer term potential for the business. However, in the near term we expect investors will be waiting for final clarity on the US LiquiBand partnering activities.

“We move our target price to 225p (previously 270p) on the basis of peer group multiples against revised forecasts and move our recommendation from Buy to Hold.”

AMS shares closed last Friday at 250p per share. They opened at 200p this morning, and by 9am had dropped to 169.50p.

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