Biosensors International (KimEng)

Event

We initiate coverage on Biosensors International with a BUY rating and a SOTP-based target price of $1.49, implying 25% upside. The company has progressed from a high-risk start-up to one poised for high growth. With BioMatrixTM, the world’s first commercially available biodegradable drug-eluting stent, to spur its growth, we expect EPS to multiply at 63% CAGR over FY Mar12-14. Approval of the product by China’s State Food and Drug Administration would add a new impetus to the share price.

Our View

BioMatrixTM is the first biodegradable drug-eluting stent (DES) of its kind to be commercially available in the world. Backed by 10 years of R&D efforts and three years of positive clinical trial data, it is slated to lift Biosensors to a higher plane as the company gains market share in key regions worldwide.

With the acquisition of the remainder 50% stake in JW Medical Systems (JWMS), Biosensors stands to benefit fully from the former’s high-growth DES business in China. More importantly, it can now tap on JWMS’s strong distribution network to market its BioMatrixTM DES. JWMS accounted for almost one-quarter of the market share of China’s medical device market in 2009. With the full acquisition, Biosensors can expect JWMS to contribute about one-third of its net profit in FY Mar13.

Terumo Corporation of Japan licenses the BioMatrixTM technology from Biosensors and produces its version of the DES under the Nobori brand. In return, it pays a royalty to Biosensors. Terumo claimed to have won 30% of the Japanese market share two months after the product launch. We expect licensing fees to quadruple from US$17m in FY Mar11 to US$66m in FY Mar12 and to grow strongly until the licensing agreement expires in 2016.

Action & Recommendation

Biosensors is a growth stock in the defensive healthcare sector. It has outperformed vis-à-vis the STI, falling only 12.8% since 1 August 2011 compared to the 17.3% decline in the index. Based on its price-to-sales ratio, the stock is trading at a lower valuation than when there were more uncertainties. We expect EPS to grow by 90% in FY Mar12 and 42% in FY Mar13. Our SOTP-based target price of $1.49 implies FY Mar12 PER of 18.7x and FY Mar13 PER of 11.0x. Initiate with BUY.