Biosensors price run-up a tad overdone

Series of positive news…
Over the past two months, Biosensors announced a series of positive news, such as a distribution agreement entered with Veryan Medical Ltd. for the latter’s BioMimics 3DTM, which will complement Biosensors’ portfolio of products in the area of peripheral arterial disease. The group had stated that they expect to commence active promotion of BioMimics 3D in 1Q15, for certain international markets excluding the USA and Japan. This was followed by the completion of patient enrolment for the LEADERS Free Japan Trial, a trial that aims to confirm that the safety and efficacy of BioFreedomTM in Japanese patients is equal to that observed in patients of other ethnicities. Most recently, we received an update on the group’s presence in China as its wholly-owned subsidiary JW Medical Systems announced completion of patient enrolment in CREDIT II Stent Trial, which involves the EXCEL II coronary stent.

…but no immediate catalyst
We highlight that the primary endpoint data for the LEADERS Free trial is expected in late 2015, with follow up planned out to two years. We may see upside arising from potentially favourable results, which could possibly show that BioFreedom offers the benefits of a drug eluting stent but with a shorter dual anti-platelet therapy (DAPT) requirement.
Share price run-up a tad too quick

Biosensors’ share price was initially supported by share buybacks but we think the recent share price run-up seems a tad too quick. The counter is now trading at around 20x 12-month forward P/E, more than one s.d above its two year historical P/E average.

Maintain SELL for now
As the group’s latest earnings performance was still largely weak and in view of its current valuation level, we are keeping our SELL rating with fair value estimate of S$0.60 for now. Key upside would come from the group’s ability to sustain its decent operating margin at ~20% as well as progress in approvals for the group’s medical devices.

Biosensors 2QFY15 core PATMI plunged 61.6% YoY

2QFY15 results significantly below expectations
Biosensors International Group (BIG) reported another set of torrid results which fell short of our below-consensus forecasts. 2QFY15 core PATMI plunged 61.6% YoY and 55.3% QoQ to US$4.4m. The decline was underpinned by a 9.9% YoY dip in revenue to US$74.8m and compression in its operating margin by 10.1 ppt to 13.5%. The fall in revenue was in turn driven by a 45.1% slide in its licensing and royalties revenue from Terumo to US$5.9m and weakness in its drug-eluting stent (DES) business in China. This was partially offset by a single-digit YoY growth in its DES volume and revenue outside of China. For 1HFY15, revenue slipped 2.9% to US$155.0m and formed 45.4% of our FY15 forecast. Core PATMI of US$14.3m translated into a decline of 39.5%, and constituted just 31.0% and 28.2% of ours and Bloomberg consensus’ full-year estimate, respectively.

Outlook remains dampening
We expect industry headwinds from intense competition and ASP erosion to remain in the near future, especially in China, and this is likely to stifle BIG’s product gross margins. BIG’s new CEO Mr. Jose Calle Gordo assumed his role in Sep this year, and one of his key initiatives would be to bring down the overall cost structure of the group. We believe this would be a gradual process, given that BIG is scaling up its own sales force in

Sale by largest shareholder - Biosensors

Shandong Weigao to sell its entire 21.7% stake in BIG
Shandong Weigao (SW), which is Biosensors International Group’s (BIG) single largest shareholder, announced that it has entered into a Sale and Purchase Agreement to dispose its entire 21.7% stake in BIG to CB Medical Holdings Limited (CBMH). The total aggregate consideration of US$312.3m translates into a purchase price of S$1.05 per share by CBMH. This represents a 11.2% premium to BIG’s closing price prior to this announcement. CBMH is an investment holding company incorporated in Bermuda. According to a SGX-net filing, it is part of CITIC Private Equity Funds Management, a large private equity fund in China. SW cited the increasingly competitive business environment in China and its decision to focus on its three core business units in which it has controlling equity interests as its reasons for disposing its stake in BIG. As SW will incur a loss of ~CNY449.0m from this transaction, we believe it also partly reflects the lack of confidence in BIG’s prospects going forward.

Transaction unlikely to impact BIG’s operations We do not foresee any impact from SW’s sale on the operations of BIG. While both companies have healthcare operations in China, BIG has

Weakening Yen to stifle licensing revenue for Biosensors

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

Biosensors revenue guidance lowered

• 3QFY13 core PATMI slips 9.2% YoY
• Drug-eluting stent business continues to perform well
• Lower FV to S$1.63

3QFY13 results missed our below-consensus estimates
Biosensors International Group (BIG) reported a disappointing set of 3QFY13 results which were below ours and the street’s expectations. Revenue fell 4.0% YoY to US$81.3m, its first YoY topline decline since 1QFY10, given weak licensing and royalties revenue (-37.8% YoY) from Terumo Corp. This was 11.2% below our forecast. Headline PATMI showed a 91.4% YoY plunge to US$24.9m, but investors should note that there was a one-off non-operating and non-cash fair value accounting gain of US$273.2m in 3QFY12 as a result of BIG’s acquisition of JWMS. Excluding this and other exceptional items, we estimate that core PATMI declined 9.2% YoY to US$24.3m, falling short of our forecast by 20.3%. For 9MFY13, revenue and core PATMI grew 21.3% and 13.0% to US$247.4m and US$81.9m, respectively.

Lowers revenue guidance, but still some positives
BIG lowered its revenue growth guidance for FY13 from 20-30% to 15- 20%. This was mainly due to weaker-than-expected licensing and royalties revenue from Japan. However, Terumo mentioned recently that its Nobori® stent sales are gradually

Biosensors one of the fastest growing companies in the Singapore Market

Biosensors International Group Ltd (BIG) is a producer of innovative medical devices used in interventional cardiology and critical care procedures. The profits of the company are driven mainly by product revenue and licensing fees from its drug-eluting stents (DES) technology.

 Acquisition of JWMS increases Biosensor’s exposure to the fast growing DES market in China
 Regulatory approval for the use of its DES technology to drive earnings upside
 Nobori sales to provide licensing income stream
 A company to grow through acquisitions
 We do not have a rating on the stock

In this report, we provide a quick summary of the business for Biosensors, one of the fastest growing companies in the Singapore Market. However, we do not commit to an active coverage and do not have a rating on the stock.

Investment Merits
Following the acquisition JWMS, one of the top three DES players in China, we believe that Biosensors is well positioned to benefit from the growing DES market in the country. The successful launch of

Biosensors continue to outpace industry growth

Fair value S$1.69


• 2QFY13 core PATMI +36% YoY
• Continued market share gains
• Revenue guidance maintained

2QFY13 core PATMI in line but revenue misses
Biosensors International Group (BIG) reported a 28.3% YoY increase in its revenue to US$79.8m and a 35.6% surge in its core PATMI to US$29.2m for its 2QFY13 results. Revenue missed our forecast by 10.7% but core PATMI matched our S$29.3m estimate, largely due to better-than-expected operating margin and lower effective tax rate. BIG’s strong 56.2% YoY product revenue growth was driven by a solid 140% increase in units sold for its drug-eluting stents (DES). However, this was partially offset by weaker licensing revenues (-29.4% YoY) from Terumo Corp (Terumo), which can be attributed to market share loss for its Nobori® DES due to new product launches by three competitors and a downward revision (~15%) in reimbursement prices in Japan. For 1HFY13, revenue and core PATMI jumped 39.3% and 25.7% YoY to US$166.1m and US$57.5m, respectively.

Licensing revenues likely to improve HoH in 2H

Biosensors a Big Player In The DES Market

target price is S$1.69



Background
Biosensors develops, manufactures and markets medical devices for interventional cardiology (IVP) and critical care procedures. It is the fourth-largest DES manufacturer in the world. There are four types of DES products in Biosensors’ IVP portfolio: Excel, AXXESS, BioMatrix, and BioMatrix Flex. This segment contributed 76% of the group’s overall revenue in 1QFY13. Biosensors distributes Excel in China through wholly-owned JW Medical Systems. JWMS is one of the top three domestic suppliers in China. Biosensors also has licensing agreements with Terumo Corporation, a leading global medical device company. Terumo has exclusive rights to Biosensors’ technology in Japan and non-exclusive rights for markets outside Japan and the US.

Investment Highlights

- Maintains presence in key markets with renewed licensing agreement with Terumo. On 1 Oct 12, Biosensors International Group (Biosensors) announced it had extended the agreement with Terumo Corporation (Terumo) to end-14. This permits Terumo to continue using the BioMatrix technology in its own drug-eluting stents (DES), which it distributes to over 20 countries across Europe, Asia and Latin America. We view this favourably as licensing revenue makes up 20% of Biosensors’ total revenue as at 1QFY13. Licensing revenue has grown more than 14x to US$81m in FY12 from FY08.

- Earnings boost in FY13 on JWMS consolidation. JW Medical Systems (JWMS) will be fully consolidated into Biosensors’ results in FY13. This will boost Biosensors’ earnings to a historical record high. Management expects FY13 revenue to grow

Biosensors still offers a potential upside of 15%.

Target price: SGD1.42


Price cut concerns overdone, Reiterate BUY. Biosensors’ share price has underperformed the STI by 25% on a YTD basis. The chief reason has been the concern over potential price cuts of drug-eluting stents (DES) in China and Japan. While the concern is real, we believe that Biosensors has been overly penalised. Trading at 12x FY3/13F PER, we think that the negatives have been priced in and valuations are looking cheap. Reiterate BUY with target price of SGD1.42.

Volume growth could mitigate price decline. The BioMatrix DES is the first-to-market biodegradable DES and is ahead of competitors in terms of clinical trial history, a critical factor for medical products. According to an industry report by TechNavio, China’s DES market is expected to grow at a CAGR of 25.5% over 2011–2015, backed by rising incidence of cardiovascular diseases. Declining prices could be mitigated by volume growth and we think that Biosensors is in a prime position to capture this growth.

Distribution channel a strong advantage. Biosensors is still awaiting approval for

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

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