Market share gains should partially mitigate industry challenges
Biosensors International Group’s (BIG) regional peers Lepu Medical and Microport Scientific Corp recently announced their FY12 results in end Mar. For Lepu, its management attributed the slowdown in topline growth to a deceleration in growth in percutaneous coronary intervention (PCI) surgeries in China and more intense competition in the drug-eluting stent (DES) market. For Microport, its DES sales rose 1.7% to CNY741.7m, driven by a 5.2% increase in volume but partially offset by an estimated 3.3% decline in ASPs. Its management also highlighted higher competitive pressures as four new local players entered the Chinese DES market. Tenders by some provincial governments have also led to stent price cuts and we expect BIG to be adversely affected by this as well. However, this would be partially mitigated by continued market share penetration in its key markets, such as the EMEA region, which is still growing at double-digit pace.
Deepening collaboration with Terumo Corp
Licensing and royalties revenue from Terumo Corp’s (Terumo) Nobori™ DES sales in Japan used to be a key growth driver for BIG when it was launched in May 2011. However, with the increased competitive pressures caused by new product launches, this component became a drag on BIG’s overall revenue growth in the last two quarters. Hence, BIG is stepping up its collaboration with Terumo to promote the Nobori™ DES system at specific specialist cardiology centres in Japan. However, we are cognisant of the negative impact which would result from a further depreciation of the Japanese Yen (JPY) due to stimulus measures by the Bank of Japan.
Maintain BUY with slightly lower FV
We thus trim our FY14F revenue and core PATMI forecasts by 0.6% and 1.6%, respectively. Our FCFE-derived fair value estimate declines marginally from S$1.63 to S$1.60. BIG is currently trading at 14.9x FY14F PER, approximately in line with its 3-year average forward PER. But if we strip out its strong net cash, its FY14F ex-cash PER translates into an attractive 11.0x. Maintain BUY.
Depreciating JPY could be a concern for BIG’s licensing revenues
The JPY has depreciated ~14.5% against the USD YTD, driven largely by the introduction of aggressive new monetary easing measures by the Bank of Japan in a bid to boost the economy and end deflation in the country. Given that BIG’s licensing agreement with Terumo for Nobori™ DES sales in Japan is denominated in JPY while its reporting currency is in USD, a depreciation of the JPY against the USD would impact its licensing revenue negatively. Notwithstanding this, BIG is also aiming to step up its operations in Japan and enhance its collaboration with Terumo by acting as its distributor for the sale of the Nobori™ DES to Japanese hospitals which Terumo is currently not selling to. Previously, BIG was only selling bare metal stents and critical care products in Japan. Hence we believe that this would help to form a natural hedge as the licensing cash flows received from Terumo can be used to pay for the expected increase in operating expenses in Japan.
New product launches to consolidate its strong market position
BIG has earmarked a pipeline of products to be launched in 2013, including an improved version of its flagship BioMatrix Flex™ DES, which we expect to remain as its main growth driver this year. Other products include its next-generation BioFreedom™ drug-coated stent (full commercial launch expected only in 2014), coronary and peripheral drug-eluting balloons under an OEM agreement, Axxess™ bifurcation stent with new dimensions and a bare metal cobalt chromium stent.
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