The idea of an "electronic nose" was initially treated by investors as a bit of a joke, and the shares quickly fell to a discount to the 100p offer price. But better-than-budget sales in the US and a chunky distribution agreement with a Japanese brewing giant have helped change views. Now the shares stand at 143p and are poised to go higher, with a string of new joint ventures to maintain the momentum.
Allan Syms, the managing director, says the applications for precise measurement of aromas are almost limitless. Obvious areas include food and drinks, cosmetics, and environmental control. But there are many far less obvious. For example, car makers put great effort into ensuring that new cars have an appealing smell. They want any plastics used in the production process to be odour-free. Traditionally workers have sniffed the raw material as a test, but unions fear health hazards, hence interest in AromaScan.
Similarly, one of the quality checks on silicon chips is that there is no lingering hydrogen sulphide (famous for its rotten eggs smell) that could affect quality. Detection equipment has a role to play. Human sniffers, on the other hand, have a further problem - the nose quickly adapts to a "smelly" environment, losing its detection ability.
Initially the company is focusing on industrial applications, but a few years on, the even greater potential of consumer markets beckons. A low- cost aroma detector could be mounted in the fridge, for example, to monitor freshness, or in the oven to alert cooks when the roast is perfectly done.
Dr Syms points out that AromaScan is not like "blue sky" biotechnology companies. It is not trying to develop a new blockbuster drug, but already has a product selling in significant numbers. Recent customers include Nestle, Shell and BP in the UK, and Union Carbide, Capital Vial and Johnson & Johnson in the US. Earlier buyers include Esso, General Electric, Hershey, Pepsi, 3M, Seagram, Warner-Lambert, and General Motors. The international distribution network includes representation in more than 20 countries, with sales last year of pounds 1.18m against just pounds 70,000 in the preceding eight months to 30 April 1994.
Credibility leapt with the announcement of a pounds 3.7m exclusive distribution deal with Kirin Techno-Systems, a subsidiary of the Japanese brewing giant, Kirin, which has contracted to purchase at least 100 systems over the next three years. It also has an option to extend the agreement for a further two years, with minimum purchases of a further 100 systems.
Not only does Kirin privately expect sales to be two or three times the minimum level, but also additional revenue from consumables. A reasonable expectation is that such items as specially designed bags will generate annual revenue at around 50 per cent of the original system cost. On a global scale this has the potential to become a high-quality stream of repeat income, with gross margins expected to be around 50 per cent, against even higher levels on the initial system sales.
The recent strength in the share price reflects a growing awareness that the Kirin deal, announced on 26 September, will be only the first of several. Unlike the Kirin deal, involving a specific region, the emphasis is likely to be on joint ventures with large companies wanting to exploit the AromaScan technology in particular industries. Terms are likely to involve a small upfront payment to AromaScan and perhaps a 30 to 40 per cent profit share.
The group does not need more money upfront because it is past the peak of development spending, has been consuming less cash than expected recently, and had more than pounds 8m cash in its April 1995 balance sheet. Next year is likely to see a deal with a larger partner involving development of the technology.
Dr Syms is optimistic about the company prospects, describing digital measurement of smell as one of the last great technological breakthroughs. He is confident that AromaScan has the ability to become a company with annual sales between pounds 100m and pounds 200m on 50 per cent-plus gross profit margins. That kind of performance would mean a great deal to a company presently capitalised at just under pounds 40m.