AdvanSource Biomaterials - A Pure Play on Medical Polymers

Business Description

Ekimas Corporation (OOTC:ASNB) is a company that sells biomaterials, as its name implies. Biomaterials, in the context of this company's purpose, can be thought of as raw materials that are used for the design and development of medical devices. While biomaterial has only gained traction with the FDA within the past decade, it is already considered so revolutionary that some medical devices would not be viable without them.

The global implantable biomaterials market can be segmented by materials types, applications and region. The four types of material are classified as metallic, polymers, ceramics and natural. The applications of implantable biomaterials include Cardiovascular, Orthopedic, Dental, and Ophthalmology, among others. There are four regions that implantable biomaterials can be attributed to; North America, Europe, Asia Pacific and the rest of the world.

AdvanSource Biomaterials focuses on polymers.  Medical devices that use these polymers are primarily implantable. The polymer segment is one of the fastest growing segments in the biomaterial market due to its flexibility, biocompability, and durability, in part due to the increased need for cardiovascular applications for a growing aging population (for use in pacemakers, for example) 

As far as regions are concerned, the one that represents the fastest growth of implantable biomaterial applications is Asia. The market for implantable biomaterial is forecasted to grow at 6.73% with the market being worth $133 billion by 2022. The market is currently valued at around $79 billion. 

Polymer Biomaterial

One obvious question to ask is why would a medical device manufacturer make the switch to using biomaterials? Device manufacturers are known to be conservative and do not like moving to other raw materials without a very compelling reason for fear of facing unforeseen obstacles related to FDA approvals. However, polymer biomaterials are actually very compelling and if the materials have the right properties, the swith to this material may have merit.

For example, using a specific polymer for a device can make it more efficient, safer, or increase the life of the device. Some devices may not even get FDA approval if it were not for polymers.

Another important factor driving some companies to go the polymer route is that the material is not that expensive when compared to the actual cost of the device in which it is being used. This results in biomaterial polymers being a smart investment for device manufacturers. Page 6 of a presentation by DSM PTG (Formerly The Polymer Technology Group) shows some typical devices that use polymers: Vascular grafts, Pacemakers, Contact Lenses, Hip Joints, and Lumber Spinal Discs.

Products

The company describes 10 products, each of which is simply described below, sourced from one of ASNB's presentations.

Chronoflex AL- has a long history of reliable performance in both long and short term devices, this medical grade polymer has the versatility to be used across a broad range of applicational areas ranging from oncology and neurology to cardiovascular disease management.”

ChronoFlex AR-are ideal in applications requiring exceptional flexural endurance such as artificial heart diaphragms, vascular grafts, or for use in the fabrication of blood contact surfaces, such as coatings

ChronoFlex C-With a long history of reliable performance in both long and short term devices, this medical grade polymer has the versatility to be used across a broad range of applicational areas ranging from oncology and orthopedics to cardiovascular disease management.

ChronoPrene-This biocompatible elastomer may be considered as a substitute for rubber, latex and silicone materials. Its physical properties make it an optimal material for applications requiring elastic characteristics, such as compliant/ non-compliant balloons, endoscopic and laparoscopic inflation bags.

ChronoSil-These biocompatible materials maintain the inherent benefits of polycarbonate-based urethanes, including high pressure resistance, tensile-strength and superior chemical resistance combined with silicone’s industry recognized advantages such as heightened elongation, superior elasticity and a low coefficient of friction.

ChronoThane P- With a long history of reliable performance, this medical grade polymer has the versatility to be used across a broad range of applicational areas including catheters, ports and access devices.

ChronoThane T-These biocompatible materials possess characteristics such as low coefficient of friction, low extractables, dimensional stability, high impact resistance, and excellent tear strength.

Hydromed-These materials were designed for use as coatings for a wide array of devices including catheters, guidewires, sutures, introducers, rods, and valves. The HydroMed series can also be coated onto devices to reduce the absorption of white cells and proteins, thereby aiding in the analysis of blood and DNA.

HydroThane-This unique extrudable hydrophilic product line was designed to provide maximum physical properties for use in extruded or injection molded components, while allowing for consistent single-step surface lubricity characteristics and a low coefficient of friction.

PolyBlend- is a family of exceptionally soft, aromatic polyurethane elastomeric alloys, which can be used as a substitute for natural rubber or latex in many applications.

In their 10k, the company states that is believes that its product serves an unmet need in the medical device market:

“Our goal is to fulfill the market’s need for advanced materials science capabilities, thereby enabling customers to improve devices that utilize polymers. Our chemists continue to develop the ChronoFlex family of medical-grade polymers. Conventional polymers are susceptible to degradation resulting in catastrophic failure of long-term implantable devices such as pacemaker leads.  ChronoFlex and ChronoThane polymers are designed to overcome such degradation and reduce the incidents of infections associated with invasive devices.”

According to the company’s page, they serve 11 markets ranging from diabetes management to cardiovascular to neurology. It is reasonable to conclude that most of ASNB's revenues are derived from one or two of these markets, but its 10k does not break down product sales by market type. If they did, it would be possible to figure out which market they derived most of their revenue from, just based on the product descriptions above. 

According to a 2010 bizjournal report, the company’s polymers are used in “devices like artificial hearts, stents and catheters.” Catheters are just thin tubes used for a variety of functions and often inserted into the human body to treat diseases. Due to the customer concentration base and likelihood that most customers are loyal to the biomaterial brand, it's also likely that the top 2-3 customers that ASNB had in 2010 are the same ones they have now. For that reason, I believe most of the conmpany's sales are derived from polymers used to serve these three groups of medical devices.

Company History

The company was originally founded in 1990 as a subsidiary of PolyMedica Corporation to focus on biomaterials and vascular graft products (synthetic blood vessels).  In June 1996, PMI spun off CardioTech and that was how CardioTech became publicly traded. At this point in time, all the biomaterials that CardioTech sold were mainly for clinical purposes as none of them were used in medical devices yet.

From the 1996 annual report :

“CardioTech currently manufactures limited quantities of ChronoFlex and HydroThane for sale to medical device manufacturers.  To date, CardioTech's manufacturing activities with respect to the specialized ChronoFlex materials used in vascular grafts have consisted primarily of manufacturing small quantities of such products for use in clinical trials.”

In the early 2000s, CardioTech made several acquisitions that all ended up in failure.

In 1999, the company formed an affiliate that was merged with the company in 2004 to develop advanced wound healing products. In 2006, the Board of directors ceased operations of this segment. In 2001, the company acquired CDT, an OEM company. This was divested in 2008 due to bad performance.

In 2003, the company acquired Gish Biomedial, another OEM company. This was divested in 2007 for the same reason as above. After all these mistakes, it should be surprising that the company hired a new CEO and that was exactly what happened in 2006 when Michael F. Adams was chosen as CEO. Adams has been a director of the company since 1999.

The years 2007 and 2008 can be seen as a strategic reorganization for the company and in 2008, the company’s name was changed to Advansource Biomaterials. 

“WILMINGTON, Mass.--(BUSINESS WIRE)--CardioTech International, Inc. (AMEX: CTE - News), a leading developer and manufacturer of advanced biomaterials which provide characteristics critical to medical devices, announced today that it has formed AdvanSource Biomaterials Corporation to conduct its business and align its name with its strategic focus. The new subsidiary was formed in anticipation of a Company name change and is subject to stockholder approval later in 2008. Commenting on today’s announcement, CardioTech’s CEO Michael Adams said: “AdvanSource Biomaterials reflects more accurately our strategic business model which focuses our advanced polymer technology and customization capabilities on a broad range of disease states and medical device sectors.” In connection with its restructuring during the past year, CardioTech has sold two subsidiaries that no longer fit its strategic focus, realizing approximately $7.5 million in cash.”  (source: http://www.biospace.com/News/cardiotech-international-inc-forms-new-subsidiary/98317)

From the company’s 2007 10k, the company stated the following:

“In fiscal 2007, we began the process to vertically integrate our materials science technology operations, the developer, manufacturer and marketer of our proprietary polymers, with engineering services and contract manufacturing primarily operating from our Minnesota facility.  An important step was the hiring of a Vice President and General Manager, Product Development Engineering Director, and Regional Sales Manager at our Minnesota facility.

During fiscal 2007, we completed an in-depth study of our strengths and weaknesses and the opportunities in the medical device marketplace.  This effort was designed to make us more competitive than in the past.  The research pinpointed our unique materials science strengths that have the potential to be marketed to our existing customer base and to a broader range of medical device developers.  Most importantly, we also discovered a major void in the marketplace we believe can be filled with our strong materials science capabilities to maximize the early development phase of devices that utilize polymers.”

Khristine L. Carroll serves as the current Senior Vice President. While the annual reports from 2010 to 2015 do not really talk about her sales strategy, I believe she played an instrumental role in getting more sales for the company during the last five years. In fact, her biography page on the company’s website has more detail on what she did than do the 10ks.

Performance

The company derives its revenues from sales of biomaterials and licensing agreements. According to the company:

"We have agreements to license our proprietary biomaterial technology to medical device manufacturers and develop biomaterials for incorporation into medical devices under development by our customers.  Royalties are earned when these manufacturers sell medical devices which use our biomaterials.”

As we can see from the annual comparison table, the company’s performance troughed in 2012 and started to trend upward from there. Cost containment measures and improve efficiency in the manufacturing process were very essential for them. In fact, their manufacturing process was just so bad that it cost them more to manufacture their biomaterial than the actual value they were sold for during 2011 and 2010 as you can see in the row titled Gross Profit (Products).

The company has remedied this situation so its gross profit on product sales was much higher in 2013 than in 2010 even though product sales in dollars were similar. SG&A and R&D both were dramatically reduced. The company claims in its 10k that reduction in R&D was pretty much non-essential for its actual R&D. It wasn’t that they conducted less research or fired a bunch of scientists. Considering how wasteful the company was in their manufacturing process, I’m would not be surprised if the same was true for their corporate overhead and research department. Overall, the company is much leaner now than they were five years ago and can profit at a much lower level of sales, but product sales have also been trending upward. In the 10ks, the company simply says they sold more product without giving much explanation, but I think we can better understand what the company did that increased sales by looking at Khristine Carroll’s bio page.

“Ms. Carroll was appointed SVP-Commercial Operations in April 2010 after joining the Company in 2008 and spearheading the development and growth of ASB’s first Commercial Division. Ms. Carroll has been responsible for developing a sharply-focused sales and marketing platform; growing the business through vertically integrated partnerships, international and regional sales force initiation and the expansion and establishment of strong business growth strategies through robust contract negotiations, product line extensions and targeted customer focus initiatives.”

This can basically explain most of the upward trend in sales. In the biomaterial industry, just having superior material is not enough if you can’t convince device manufacturers to use them. There is no point in developing superior products if you can’t sell them or do not have the people to sell them for you. Device manufacturers may not initially know the benefits of using these materials and having a good salesman or saleswomen to convince these manufacturers to try their biomaterials is as important as having good products in the first place.

Annual Comparison

Fiscal Year	2015	2014	2013	2012	2011	2010
Products	1799	1771	1420	925	1179	1351
Royalty	775	855	775	941	487	766
Total Sales	2574	2626	2195	1866	1666	2117
Gross Profit (Products)	871	765	607	28	-344	-5
Gross Margins (Products)	48.4%	43.2%	42.7%	3.0%	-29.2%	-0.4%
SG&A	1222	1433	1609	1844	2491	2727
R&D	356	394	444	605	734	657
EBIT	68	-207	-671	-1480	-3082	-2623
Shares O/S	21491	21491	21491	21415	21307	21153
Cash	75	268	103	484	477	3055

 

Quarterly Comparison

	2016	2015	2014	2013	2012	2011
June
Product	1048	366	264	343	194	402
License	123	255	228	122	121	101
Net Income	337	-132	-256	-393	-562	-642
September
Product		299	456	331	321	361
Liscense		255	115	120	527	130
Net Income		-176	-191	-324	38	-710
December
Product		355	425	440	179	264
License		142	260	429	177	163
Net Income		-185	41	113	-651	-803
March
Product		779	626	306	231	152
License		123	252	104	116	93
Net Income		175	-115	-407	-637	-1030
Fiscal Year
Product		1799	1771	1420	925	1179
License		775	855	775	941	487
Net Income		-318	-521	-1011	-1812	-3185

The company’s performance for the last two quarters was very impressive.  The increase in sales came from increased product sales. As it is not clear if this is sustainable, an interview with management will be needed to confirm whether or not this was a one-time anomaly.

 I have difficulty reaching management because I’m currently in Hong Kong and as usual, most companies do not reply to my emails and emails are also not exactly the best way to talk to management as it gives them way too much time to craft the best possible reply. Here are some questions I would like to ask them if possible:

• Why was there such a huge increase in sales compared to prior quarters? Is the customer using them for clinical trials or are their devices being commercialized?
• Which product was predominantly being bought by this customer? (Because the company has 10 different biomaterials)
• How long have you been doing business with this customer?
• What medical device is out there that is currently using the company’s products?
• What is the life span of that device and how much biomaterial does it consume?
• What is the expected trend for licensing?
• Why has it taken so long for the company’s product to gain traction?

(They’ve been selling the same products since inception and while I think the obvious answer is that it takes a long time to develop medical devices and gain FDA approval, I just want to hear what management has to say.)

• Why did CFO resign and will they hire a new CFO?

(The CFO resigned in 2014. David Volpe had served as CFO since 2009 and from 1999 to 2003. Druing those years, he served as a strategic advisor for the company through Carmel Lakes Venture LLC. If he had not resigned in 2014, the company wouldn’t have been profitable because they saved over $200,000 since they do not have to pay a CFO salary. Although I am not completely sure why he left, I believe it is because the CFO had more responsibilities he needed to take care of for Lakes Venture LLC. LinkedIn Page: https://www.linkedin.com/pub/david-volpe/6/8bb/822 )

A legitimate valuation of the company is contingent on knowing if the recent quarters' sales are sustainable.

(Note: The Company changed auditor in 2012. Some auditors do not want to work with companies that are about to go under so this was not really a red flag to me.)

LINKS RELATING TO COMPANY AND BIOMATERIALS IN GENERAL

1. http://www.bizjournals.com/boston/news/2010/11/16/advansource-biomaterials-to-be-delisted.html
2. http://www.biospace.com/News/cardiotech-international-inc-appoints-dr-szycher/27339
3. http://phx.corporate-ir.net/phoenix.zhtml?c=68271&p=irol-newsArticle_pf&ID=1232112&highlight=
4. http://www.advbiomaterials.com/news_events/2008.10.15 AdvanSource Biomaterials Corporation Approved by Shareholders as Company Name at CardioTech Annual Meeting.pdf
5. http://it.tmcnet.com/news/2009/03/05/4033701.htm
6. http://www.marketsandmarkets.com/PressReleases/global-biomaterials.asp
7. https://www.dsm.com/content/dam/dsm/medical/en_US/documents/pp-the-business-of-biomedical-polymers-innovating-at-the-bottom-of-the-food-chain-21-mar-2010.pdf
8. https://www.linkedin.com/pulse/biomaterials-market-size-growth-analysis-research-2020-chakravorty
9. http://www.medgadget.com/2015/09/global-implantable-biomaterials-market-key-players-are-advansource-biomaterials-corporation-collagen-matrix-inc-corbionpurac-ceradyne.html
10. http://www.prnewswire.com/news-releases/global-biomaterials-market-to-become-worth-usd-336-billion-in-2019-transparency-market-research-278648051.html
11. https://www.youtube.com/watch?v=uta5Vo86XL4 (TED TALK)

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