Kim Eng on 30 Aug 2012
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 sale of its flagship BioMatrix Flex DES in China. We believe that once approved, Biosensors would have an edge over other foreign competitors given JWMS’ strong distribution network. Distribution is one of the key challenges for foreign competition as they have to go through various layers which increase cost and inadvertently have to price their products higher.
At an early-growth stage. Biosensors has communicated its goal to transform itself into a multi-product medical equipment company. With Shandong Weigao as its major shareholder, we expect to see some corporate actions that would move the company towards this goal.
Maintain BUY, TP SGD1.42. We lowered FY3/13F forecast by about 13% as we expect Biosensors to incur higher operating expenses to support its revenue growth and for development of future products. Our target price is reduced to SGD1.42 which implies FY3/13F PER of 14x. With negatives priced in, the stock still offers a potential upside of 15%.
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