Biosensors management’s 20-30% revenue growth guidance

Share price correction does not justify valuations
Share price has corrected 12% on various concerns. Since our post FY13 results report, BIG’s share price has fallen 12% from S$1.285 to S$1.14. We attribute the sell off partly to:
(1) BIG’s exposure to Europe and overall market correction
(2) sequential slower rate of growth of Terumo sales
(3) expected pricing cuts in China and competition from biodegradable stent in Japan and
(4) a lack of growth visibility on revenue guidance of 20-30% growth.

We believe concerns are unwarranted and well-factored into our forecasts. We find that the concerns listed above are largely unwarranted as
(1) European exposure is limited to approximately 20% of overall revenues
(2) our Terumo sales expectations have already been lowered and factored into our growth estimates
(3) expectation of price cuts in China have been factored into our revised revenue growth expectations and current valuations fully reflect any impending price cuts
(4) revenue guidance of 20-30% is partly a function of the full 12-month contribution from JWMS’s consolidation as well as continued market penetration primarily in China, therefore leaving a low market penetration watermark for management to achieve
20-30% sales guidance.

BIG now trades cheaply at valuations well below average of 14.5x PE, and 0.5x PEG. BIG’s share price is now trading at an 11.8x PE. This is below -2SD of 12.2x from its historical mean of 14.5x, since September 2010. Furthermore our earnings CAGR growth of 23% for FY13/FY14F values the stock at a PEG of 0.5x.

Still a market leader, despite competitive threat
Competitors will still require time to establish a credible threat to BIG. BIG’s BioMatrix is still a leading product in the market. Its four years LEADERS trial results continue to show high efficacy and low levels of late loss. Abbott’s recent approval of its XIENCE PRIME DES stent in Japan is yet another permanent polymer stent compared to Terumo’s NOBORI biodegradable polymer technology.

The recent 10-year clinical trial results of Igaki-Tamai’s biodegradable stent have only a patient size of 50. Although we think that the 10-year time frame is credible and far surpasses LEADERS’ trial results of four years, its patient size of 50 makes the study inconclusive, in our view. Until its competitors come up with biodegradable technology or trial data for biodegradable stents become more credible, we do not see BIG losing the lead in the stent business as yet.

Maintaining its lead, BioFreedom continues to develop. While competitors are also developing products, BIG’s polymer-free stent BioFreedom continues to develop. We are expecting BioFreedom to secure CE Mark this year followed by a volume ramp up over the next two years.

Management’s 20-30% revenue growth guidance is still very much visible
Growth primarily fueled by penetration in China. Now that corporate activities, including consolidation with JWMS and Terumo’s NOBORI stent being approved for sale in Japan, have happened, earnings growth will now be primarily supported by continued market penetration of stents in key markets especially China. Post JWMS consolidation, China is now a key market for BIG.

Apart from awaiting BioMatrix’s approval for sale in China, BIG’s growth catalyst in China will come from market penetration into the rural hospitals. According to Frost & Sullivan, there were close to 21,000 private and public hospitals in China in 2010 and cardiovascular and heart diseases each accounted for 20% of total deaths in urban areas in 2009, behind cancer (27%).

Share price decline has factored in potential China price tender and ASP drop in stents. Furthermore, we believe that BIG’s share price fully reflects the impact of the price cuts. Our sensitivity analysis shows that earnings growth would still be 19% instead of 30% in FY13F even if we were to take 20% off our revenue estimates of the Interventional Cardiology segment. Valuation would be 13x at -1SD PE valuation. Therefore, we think the price decline is overdone.

Europe continues to grow albeit at a slower pace. With economic difficulties happening in Europe, our view on BIG’s European business is that growth would be slow. BIG does not disclose the geographical mix of its business, but based on our assessment, we believe BIG’s Europe business is approximately 20% of total revenues with major exposure to Switzerland, France and Netherlands. Our view is that BIG will continue to gain market share in Europe albeit at a slower pace.

Japan will continue growing at a steady rate. We expect Terumo licensing to continue growing for BIG on the back of Terumo’s market share increase in Japan. Over the past five quarters, we have seen BIG’s licensing and royalties segment revenues grow from US$4.8m to US$22.8m. The last two quarters’ slow growth could suggest that Japan’s revenue acceleration from a low base is essentially done. We are therefore expecting Japan to continue growing but also at a less aggressive pace.

Acquisitions – a potential catalyst that nobody knows
Potential acquisitions. We believe potential acquisition targets and the timeframe for them to happen are highly unpredictable. We however understand that management has a vision to build up BIG to offer a wider range of medical products and not just in the cardiovascular field. BIG has more than US$300m in cash available for acquisitions and believe that the Indian market could be an area of interest to the management. We have yet to price potential acquisitions into our valuation and if anything this will provide additional upside to our target price.

Growth expectation is achievable, share price at just 12x FY13F PE – what a bargain!
23% CAGR growth in FY13/FY14F remains supportable. Our forecast for FY13F means 30% net profit growth from US$101m in FY12 to US$130m. Growth contribution by key markets of China, Europe, Terumo licensing and 12 months’ contribution in FY13F of JWMS and Terumo supports the 30% y-o-y growth.

We think 12x PE is a bargain, reiterate BUY TP at $1.57. As we have been tracking BIG’s share price since our initiation in September 2010, we have found average PE valuations trading at 14.5x PE. At the current 12x PE, we believe its fundamentals are still firm. Even key risk such as a potential price decline in China is already well priced-in. Our SOTP for BIG remains at S$1.57. BUY for 38% upside.