The pandemic has created a challenging environment for pharma stocks like Advanced Medical Solutions (LSE:AMS). Its performance in 2020 is best described as lacklustre, but not entirely unexpected.
The business is a developer and manufacturer of surgical and wound care products. These range from tissue adhesives to wound dressings sold under multiple globally recognised brands. With lockdowns keeping people at home, A&E visits have dropped by almost half. Furthermore, with hospitals overwhelmed by Covid-19 patients, many elective surgeries have been delayed by a similar rate.
Combined, this had led to a significant decline in product sales. But now that the vaccine rollout is underway, is the tide about to change? Is this pharma stock about to make a comeback in 2021? And should I consider adding it to my portfolio?
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A pioneer in wound care
AMS has been around since the early 1990s. It was initially a research and development firm. But skip forward a few decades and a couple acquisitions, and the pharma stock has become a leader within its market space.
The business can be broken up into two units. Unit one is called Surgical. It sells AMS branded products to medical centres – such as hospitals – directly or through third-party distributors. The second unit is called Woundcare. This division develops and supplies a wide range of products to its business partners, who subsequently use them to create their own branded products.
Both segments are responsible for generating a roughly even split of total revenue. However, the Surgical unit appears to be significantly more profitable, with an operating margin of 34% in 2019.
As previously stated, Covid-19 has had a major impact on this stock. While its manufacturing facilities remained in operation throughout 2020, general demand for the firm’s products fell sharply. As a result, forecast revenue for 2020 is expected to be around 20% lower than in 2019.
However, the catalyst behind this poor performance looks only temporary to me. And with Covid-19 slowly coming under control, I believe that demand can return and even grow in the latter part of 2021. But as always, there are plenty of challenges and risks ahead.
A fiercely competitive market
Wound care and surgical are highly competitive spaces. While regulators make it difficult for new entrants, the number of global competitors for the company continues to rise.
As such, the need to continually innovate and expand its intellectual property portfolio is exceptionally high. But this might begin straining the company’s financials.
Fortunately, there’s a large proportion of cash on the balance sheet that has proven vital to continue funding its R&D department throughout the pandemic. However, should the business make another acquisition, this cash balance may no longer be available to rely on if another similar event were to occur.
Is the pharma stock on my buy list?
AMS looks perfectly positioned for a rebound in my eyes. Assuming that demand returns to pre-Covid levels later this year, the current stock price seems relatively low. The fierce competition will continue to be an ever-present threat, but the potential reward might just outweigh the risk.
Therefore I think the stock could be a fantastic opportunity for value investors, and perhaps even my portfolio as well.
