A massive share price increase of 600% in the last 12 months has placed ADMEDUS FPO (ASX: AHZ) , formerly known as Allied Healthcare Group, in the spotlight. Today’s announcement that the company has gained US Food and Drug Administration (FDA) approval for its CardioCel product is good reason to be optimistic about future growth. It now looks like major shareholder Andrew Forrest, the founder of Fortescue Metals Group Limited (ASX: FMG), is onto another winner.
CardioCel is a bio-absorbable and bio-compatible patch made from bovine pericardium, through a patented tissue engineering process. The patch is used to repair congenital holes and other damage inside the heart. The patients’ own cells then cover the patch, making it “invisible” to their immune system. It is therefore thought that the use of CardioCel will reduce the likelihood of further complications for those requiring heart repair. Recent data shows that there was no calcification in children implanted with CardioCel five years ago, so that’s a good sign.
Admedus is a company with three business segments. First, there is the mildly profitable medical products segment, which earned about $750,000 from revenue of $7.39 million in FY 2013. That’s a segment profit margin of just over 10%, which is not particularly exciting, but is up from about 4% in FY 2012. The second segment is the business that sells CardioCel. The third business segment is researching Herpes Simplex Virus (HSV-2) with a view to finding a vaccine. To clarify, HSV-2 is the virus that commonly causes genital herpes. HSV-1 usually causes cold sores and is known to provide some degree of immunity to HSV-2. Hopes are high that the vaccine could also help people who have already contracted HSV-2.
In Australia, CardioCel was approved for the correction of congenital heart defects in children. In FY 2013, the company booked revenue of $12,000 from sales of CardioCel, and six surgeons used CardioCel in “around 60” operations from October 2012 to June 2013. Other analysts have suggested the selling price for CardioCel is around $1,200, but I think it’s probably higher than that.
Despite the company announcing FDA approval today, the share price has barely moved, possibly indicating that many market participants were confident of approval. As a shareholder, I am optimistic because the FDA approval is for a broader use than in Australia. Adult patients with congenital cardiovascular defects will be able to access CardioCel in the USA. This is significant because the majority of people hospitalised due to a heart defect are adults. Congenital heart disease is present in about 0.8 % of all live births, but not everyone requires surgery at a young age.
According to the Children’s Heart Foundation, almost 40,000 babies are born in the USA each year with a congenital heart defect and more than 50% will require invasive surgery in their lifetime. That means, each year around 20,000 people are born who might have a use for CardioCel. Furthermore, adults who require further surgery for heart defects might also use CardioCel.
Admedus shares are up less than 10% at the time of writing, indicating to me that either the market had assumed CardioCel would be approved for adult use in the USA, or that it has under-reacted to today’s announcement. Although Admedus is not exactly a safe stock at a great price, I believe that the company is one of the better biotech investments on the ASX, because the tissue engineering process used to develop CardioCel should eventually lead to the development of new regenerative tissue products for other defects and diseases. That means the company could gradually grow revenues for many years to come and generate further capital gains for investors.
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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Admedus.