SG: Biosensors International (BIG SP) | Healthcare

BUY | Target price: SGD1.42 | Upside 15%

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%.

Next-generation DES. Biosensors’ next generation DES, BioFreedom, which is a polymer-free DES could receive its CE Mark approval by the end of the financial year FY3/13. Biosensors is in the playing field for the next generation stents. Biosensors would build a body of clinical evidence before making BioFreedom commercially available. It has already started on this with plans for LEADERS FREE program. This would enroll about 2,500 patients from 60 sites across Europe, Asia and South America, with follow-up for 2 years. The process is expected to be completed by early 2014.

Gaining market share. Biosensors is steadily gaining market share worldwide, with emphasis on the EU and the Asia-pacific region. It does not compete in the US market. Based on data from Bloomberg, Biosensors holds a market share of about 3.4% in the global DES market. This excludes the Nobori Stent which is licensed to Terumo Corporation for exclusive sale in Japan. Terumo has achieved about one-third market share for the DES market in Japan. In China, JWMS already holds a 22% market share and is the third largest domestic player. We estimate that the Biosensor’s worldwide market share (including Nobori Stent) could reach about 12% by FY3/15F.

Source: Maybank Kim Eng - 30 August 2012