Biosensors International Group

UOBKayhian on 18 Oct 2012

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 20-30% yoy and operating profitability to improve. With JWMS’ extensive presence in China, we expect it to be able to ride on the positive health trends in the country.

·      Ability to mitigate price cuts with product innovation… Biosensors’ response to local governments’ mandatory 15-20% price reductions for DES products is to consistently introduce new, innovative products that will retain or capture more market share. Since 2006, Biosensors has launched four types of DES, two of which belong to the BioMatrix family. Currently in the pipeline is another breakthrough DES called BioFreedom, which could be launched in the medium term. The newer-generation DES products are intended to be more resilient against price declines.

·      …and volume growth. Volume growth has so far more than offset earnings dilution from price cuts. As Biosensors reported continued growth in DES sales in 1QFY13, we estimate volumes must have grown by at least 20% yoy. Management noted that volume growth in China in particular is still very robust and it expects sales to continue to increase going forward. Biosensors is awaiting approval for the BioMatrix DES to be distributed in the country, where it will be marketed to the top-tier hospitals. Other markets maintain patronage to Biosensors’ products as they recognise the unique technology used and the strong R&D backing them.

·      Strategy to transform into a first-class global medical device platform company. In the long term, management intends to pursue an overall growth strategy of becoming more than just a DES manufacturer. In Mar 12, it announced plans to build its own Manufacturing, R&D Innovation Centre and Operations HQ in Singapore in order to develop more high-tech, value-added medical devices. The S$26m facility is slated to be completed within three years. Management is also continuing to look for external opportunities that would allow the company to expand its medical devices portfolio.

Valuation

·      Biosensors is currently trading at 13.2x forward PE, below its peers’ average of 14.2x. Based on Bloomberg, the consensus 12-month target price is S$1.69.