Dragged down by weaker licensing revenue. Biosensors reported 2QFY3/13 revenue of USD66.8m (+28.3% YoY, -7.6% QoQ) with corresponding net profit of USD28.2m (+22.7% YoY, -13.7% QoQ). Results disappointed mainly in the weaker licensing revenue (-29.4% YoY, -17.1% QoQ) from Terumo. 1HFY3/12 net profit made up 44% of our previous FY3/13F forecast. We maintain our Buy call but TP is revised down to SGD1.38 as we adjust for lower 2QFY3/13 numbers.

Compensated by stronger margins. Overall gross margin was stronger on a YoY basis at 84% from better product mix, geographical mix and positive currency effects. However, we note that pricing pressure would work to bring down product margins in future quarters, which we have accounted for in our forecasts. The Beijing price tender has once again been delayed and thus no major price cuts have been felt yet, but this could be imminent by the end of the year.

Terumo confident of regaining market share. Weaker licensing revenue this quarter was due to new DES product launches in Japan by competitors. Hospitals procure the new products for initial testings, resulting in weaker sale of Nobori Stents. However, Terumo is confident of regaining market share from the next quarter, with intention to be more aggressive in marketing and strong confidence in the superiority of its product.

Licensing agreements extended. Licensing agreement with Terumo for sale of the Nobori stent outside Japan has recently been extended until Dec 2014. For sales within Japan, Terumo would also guarantee a minimum flat licensing fee with additional fees for sales above a certain threshold. We believe this is positive for Biosensors as the minimum fee is set at a level not less than what Terumo has been paying the latter.

Maintain Buy. Biosensors is still gaining market share globally and valuations remain attractive, especially given the recent sell-down. The stock is trading at only 12.4x FY3/13F PER. While we cut FY3/13-15F net profit by 5-9%, we retain our BUY rating with SOTP-based target price lowered to SGD1.38, which implies a FY3/13F PER of 15.0x.

Source: Maybank Kim Eng Research - 08 Nov 2012