Maintain BUY
Previous Rating: BUY
Current Price: S$1.405
Fair Value: S$1.95
Strong product portfolio backed by positive clinical evidence. We expect Biosensors International Group's (BIG) earnings momentum to gain further traction as we move into 2012, underpinned by its strong product portfolio and continued market share gains. BIG presented several positive clinical trial results at the recent Transcatheter Cardiovascular Therapeutics (TCT) 2011 symposium, which is one of the most significant cardiovascular conferences in the world. The safety and efficacy highlighted for BIG's flagship BioMatrix Flex™ drug-eluting stent (DES), next-generation BioFreedom™ polymer-free DES and newly-launched Axxess™ bifurcation stent would allow the group to gain further market acceptance and consolidate physician's loyalty to its products. Johnson & Johnson's recent decision to withdraw from the DES market would also aid BIG in its market share penetration, in our opinion.
Expect robust contribution from China and Japan. BIG penetrates China and Japan via its wholly-owned subsidiary JW Medical Systems (JWMS) and its licensed DES technology to Terumo Corp, respectively. JWMS would be consolidated into BIG's financials from 3QFY12 onwards (versus equity method accounting previously), which we view positively given its strong positioning as one of the top three local DES players in China. Although the tendering process by the China government to make healthcare costs more affordable would result in pricing pressures, we opine that this would be more than compensated by higher volume growth. Royalty fees from Terumo's Nobori DES in Japan only began its contribution to BIG from 1QFY12 and we expect this to gain traction moving forward, considering its initial performance. A larger contribution from its licensing revenues would also help to support its margins by mitigating the effects of ASP declines typical in the DES market.
Maintain BUY. While we are optimistic on BIG's prospects, we believe that austerity measures undertaken by some of Europe's governments which include curbs on government healthcare spending might have some negative impact on the group. For example, it was reported that France would implement lower reimbursement rates and carry out price cuts on medical devices. Separately, Shandong Weigao has now become the largest shareholder of BIG with an ownership stake of 21.6% (previously 16.2%) following the conversion of its US$120m convertible notes. We believe this signifies Shandong Weigao's positive view on BIG's growth prospects. This would also strengthen BIG's balance sheet and place the group in a stronger net cash position. We lower our interest expense assumptions and correspondingly raise our core earnings forecast for FY12 and FY13 by 1.6% and 2.4%, respectively. Consequentially, our FCFE-derived fair value estimate increases from S$1.87 to S$1.95. Maintain BUY.
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