Biosensors gearing up for transformation

Background:
Biosensors International Group, Ltd. develops, manufactures and commercializes innovative medical devices used in interventional cardiology and critical care procedures. We are well positioned to emerge as a leader in drug-eluting stents, an evolving therapy that is rapidly gaining market share from traditional cardiovascular therapies. In June 2006, Biosensors was named one of 50 medical technology companies to be watched in Medical Device and Diagnostic Industry magazine's 50 companies to watch.

Target price of $1.80

Clear plans for the next lap
We upgrade Biosensors to Buy from Hold and raise our SOTP-based target price to $1.80 as we think that two emerging trends would help sharpen the company’s growth prospects. The first is Shandong Weigao taking on a more active role in its capacity as Biosensors’ majority shareholder and the second, China’s SFDA approval for BioMatrix should be forthcoming. We therefore assign a higher PER of 18x to Biosensors’ drug-eluting stent (DES) business to take into account greater growth potential.

Gearing up for
 transformation. Biosensors sees itself morphing from a single-product company to become a medical device platform. To this end, it plans to expand its product offerings, possibly through M&A activities. We believe that this is a necessary step to spur continual growth in the company as well as to diversify its product risks.

An important and worthy partner. Shandong Weigao has become the single largest shareholder of Biosensors with a 21.6% stake after converting its convertible notes to shares last November. It now has a greater incentive to ensure the company’s success in China. We think it would seek offshore M&A opportunities through Biosensors, rather than go it alone, to circumvent the tedious domestic regulatory approval process it would otherwise be subjected to. This would align with Biosensors’ plan to transform into a medical device platform company with an expanded product range.

Approval for BioMatrix could be nearing. Biosensors has so far kept mum on when it expects China’s SFDA to give the nod for its BioMatrix for fear of disappointing the market again. In our opinion, the long-overdue approval should be imminent this year, especially considering the ongoing positive clinical trial data.

Expect steady 3Q results. Biosensors is scheduled to report its 3QFY Mar12 results on 8 February 2012. We expect steady performance with possible positive surprise from Terumo licensing. We upgrade our stock recommendation to Buy with a SOTP-based target price of $1.80 in anticipation of greater growth potential.