Advanced Medical Solutions: Unfavorable Reimbursement Shift Drives Fair Value Estimate 18% Lower

We lower our fair value estimate on narrow-moat Advanced Medical Solutions to GBX 278 per share, from GBX 340, after reducing our 2023-25 projections to reflect the ripple effects of unfavorable reimbursement decisions by several local Medicare contractors in the U.S. This shift primarily affects the cellular and/or tissue-based products, or CTPs, in advanced wound care—a small, but fast-growing niche mainly centered in the U.S. Not only have these Medicare contractors reduced the number of these biological tissue healing products covered per wound episode, they've also limited coverage of only certain wounds and only certain brands. Unfortunately for AMS, its client Organogenesis has lost reimbursement for PuraPly, which accounted for roughly 40% of consolidated revenue at Organogenesis in 2022. Accordingly, we reduce our estimates for the original equipment manufacturer segment through 2025 to reflect the duration of AMS' contract with Organogenesis. While this coverage change weighs on our valuation, it doesn’t have much impact on AMS’ narrow economic moat, which stems from its intangible assets. We see little to change our perspective on AMS’ ability to innovate.