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Morningstar | Advanced Medical Solutions Hits Near-Term Speedbump as an OEM Customer Departs

After establishing itself as an OEM for advanced wound care products, Advanced Medical Solutions has built on its technical expertise and expanded into adjacent markets. While AMS remains a significantly smaller competitor than Smith & Nephew, Molnlycke, and ConvaTec, we like how it has shifted its focus toward the higher-margin branded products and believe this strategy should further enhance its already attractive returns on invested capital.AMS has been a powerhouse for innovation, from its ActivHeal wound care products that were specifically developed for the National Health Service to its entire LiquiBand product line of tissue adhesives. AMS' LiquiBand has been David to Goliath Johnson & Johnson’s Dermabond--with the former capturing 23% market share in the U.S. and knocking J&J out of its previous monopoly in this area. AMS has done a good job of identifying additional applications of its wound care and adhesion technologies for commercialization. For example, LiquiBand- and Dermabond-type products have been limited to topical use because the material itself would set off inflammatory reaction if left inside the body. AMS developed a different version of LiquiBand specifically designed for use inside the body and now markets the product to adhere meshes to tissue (versus tacks or staples). Although we have long been wary of the sustainability of competitive advantage in advanced wound care due to the low switching costs for customers, AMS has given us pause. The firm had historically offered a way for the larger rivals--including Smith & Nephew, Molnlycke, and Coloplast--to round out their AWC product portfolios. Because the wound care market is very fragmented across different types of products, competitors tend to exhibit strength in a few product lines but can’t necessarily manufacture the lower-volume products at scale. By consolidating all these portfolio-fillers across competitors, AMS can do so far more efficiently. With the level of materials expertise and engineering required to produce these types of products, we believe AMS' reputation in this area is a factor that draws the largest competitors to the smaller firm for manufacturing.