Wednesday, October 9, 2013

Biosensors International : MANAGEMENT REPLY: Can it meet its 15% profit growth forecast - which of the brokers is right?

5/10/2013 – Biosensors International Group disappointed with poor first quarter results but analysts say this is just a temporary lag and the stock has gained around 10% since it announced its Q1 earnings announcement.

The Group's core operations are expected to pick up and an associate starts to contribute.

Already, headwinds in key markets China and Japan have been identified.

These are the company's unaudited Q1FY14 financials on published August 7:


Revenue: -11 % to US$76.7 mln
Net Profit: -63 % to US$12.1 mln
Cash flow from operations: US$4.8 mln vs US$36.3 mln
Cash Reserves: US$546.2 mln vs US$344.1 mln
Order Book: n/a
Final Dividend: None

Revenue fell 11% on lower sales and licensing, and royalty revenues.

Product revenue also dropped 6% to US$65 mln because interventional cardiology sales went down.

The company took back drug-eluting stents from its distributors in China because new tender pricing will dampen selling prices.

Sales for its drug-eluting stents in the EMEA and APAC regions were otherwise strong.

1. What were the sales figures for drug-eluting stents in EMEA and APAC regions?

Licensing and royalty revenue was at US$11.6 mln, down 33% compared to last year.

Management reply: You’d be pleased to know that the company provides its revenue by geographical markets, broken down into China, Japan and others – in its full year financial statements announcements. It is not the Company’s policy to provide a breakdown beyond this.

2. What caused the decline in licensing and royalty revenues?

Management reply: The drop in licensing and royalty revenue in Q1 FY14 was due to a reduction in our licensee’s drug-eluting stents sales in Japan.

Operating expenses went up 6% to US$41.9 mln as more was spent on sales & marketing for payroll, brand building and trade shows.

Also weighing on profit: a doubling of financing expenses mostly for its fixed rate notes, and the absence of fair value adjustments of derivatives, which boosted last year's comparative number.

Offsetting this were reductions in expenses for administration and research & development.

There was also a gain from foreign exchange as the Euro and Singapore Dollar strengthened against the US currency.

Cash and equivalents are at US$546.2 mln compared to US$344.1 mln the previous year.

Management maintains its 15% growth guidance for FY14, through sales of drug-eluting stents in the EMEA and APAC regions – as well as China.

It will generate revenue from new but undisclosed sources and the newly-acquired advanced functional assessment technology company, Spectrum Dynamics.

We previously reported that mystery shrouded both the Group's unexplained FY13 revenue growth target miss, and its acquisition of a private Israeli enterprise, Spectrum Dynamics.

Now that the Group has disclosed its 15% FY14 revenue growth guidance, we are left unsure if it will pull the same punches, especially when we do not know the exact status and contribution capability of Spectrum Dynamics.

Its licensee in Japan should generate more revenue as Biosensors shares its expertise with it.

3. What sort of support is the Japanese licensee getting? Training? A manual?

Management reply: Under the licensing agreement, Terumo will incorporate the Group’s BioMatrix™ technology in the production, marketing and selling of its Nobori™ drug-eluting stent in markets worldwide (including Japan) outside of the U.S. Nobori incorporates both Biolimus A9™ (BA9™), an anti-restenotic drug developed and patented by Biosensors specifically for use with stents, as well as Biosensors’ unique abluminal biodegradable polymer coating.

The company expects interest expense and interest payments to increase as a result of issuing US$240 mln in principal amount of 4-year notes.

But with the cash from these notes and continued improvement in operations, Management says it is not planning on raising more funds.

Analysts surveyed by Reuters have an average HOLD call with a price target of US$0.87.

Bullish analyst report
Bullish analyst report

Nomura Research said it is a good time to buy this stock as it looks oversold and its price is comparable to the S$0.888 per share which Hony Capital paid in 2010 to gain its strategic hold.

It is confident China and Japan operations will recover and contributions from EMEA and APAC stent sales will maintain in addition to another performance boost which should come from Spectrum Dynamics.

In spite of this confidence though, Nomura issues a BUY call but revises its price target down to S$1.70, based on a lower valuation of the Group's business in China.

CIMB Equities Research said long-term profitability is still intact and the rest of the year will see improvements.

First quarter performance was disappointing no doubt but the inventory adjustment in China was just "short-term pain" and sales will come forward when inventories are restored to normal levels.

CIMB issues a BUY call with a price target of S$1.32.


Bearish analyst report
Bearish analyst report

DBS Vickers Research found revenue and margin declines unsatisfactory.

Still further decline to margins are expected from lower licensing revenue and China price cuts.

It has a HOLD call with price target of S$1.09, previously S$1.64.

OCBC Investment Research said performance was significantly below expectations but recognises the silver lining in the positive sales performance for drug-eluting stents in the EMEA and APAC regions.

It thinks the Group will not attain its 15% FY14 growth guidance because the drug-eluting stent industry is now more difficult an environment.

4. Will you be cutting guidance again?

Management reply: The Company does not practise selective disclosure. Material information is simultaneously disseminated and publicly released via SGXnet, and posted on the Company’s website at www.biosensors.com.

China and Japan being major markets for the Group contributed 31.8% and 19.6% revenues respectively.

But the recent regulatory price cuts and intense competition now pose challenges.

In Japan, the Group expects more royalty revenue from its licensee, Terumo Corporation which currently licenses Biosensors' drug-eluting stent technology to produce its own stent it calls Nobori.

OCBC however thinks this figure can only be modest as competition has heated up with direct competitor Abbott Lab having launched its XIENCE Xpedition stent and a randomised clinical trial for its Absorb bioresorbable vascular scaffold.

Worse still, Terumo might not renew its licensing for Nobori production at the end of 2014 because it is now capable of producing stents on its own.

Question 5. Is this departure symptomatic of all your licensees? What are your plans to keep their interest?

Management reply: Terumo is our only licensee at the moment. The plan(s) we have with regards to licensing our technological designs is a commercial secret.

Question 6. How many licensees do you have altogether at the moment? Are you finding more outside China and Japan?

Management reply: Please refer to the previous answer.

In China, tenders for stents affected several provinces where there was a price reduction by about 15%.

Microport Scientific, one of Biosensors' two key competitors in China, issued its warning of a profit reduction as a result of these tenders, and the effects from having more local businesses producing drug-eluting stents.

Question 7. What do you think of China's improvement in intellectual protection in recent years? Do you think these efforts truly protect your patents? Have your patents been poached before? How are you protecting these patents against the local businesses?

Management reply: According to analysts, it is believed that China is taking conscious effort to improve its intellectual property protection. We rely on intellectual property rights for the protection of our drug-eluting stents and other proprietary technology we have, and we intend to pursue aggressively, and defend, patent protection on our proprietary technology.

Costs are also anticipated to escalate with higher sales and marketing expenses to sustain or grow market share.

OCBC has a HOLD call with a fair value of S$0.96.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

Key financial ratios
Key ratios
The ticks and crosses below indicate whether the stock meets the following value investing criteria.
Price-book: 1.02x - "Price is what you pay, value is what you get" - Are you getting more than you pay for?
Yield: 2.69 - Does the stock pay a risk premium over fixed deposit rates?
Cashflow: US$4.8 mln - "Profit is opinion, cash is fact" - Is the company generating cash?
Total cash & equivalents: US$546.2 mln - Does the company have cash?
Source: Reuters
Management: Biosensors International Group was ranked 71st in the Governance & Transparency Index, with a score of 55 points.

Major shareholder(s):
21.85% - DBS Vickers Securities (S) Pte Ltd
19.91% - Raffles Nominees (Pte) Ltd
12.61% - DBS Nominees Pte Ltd
7.58% - DBSN Services Pte Ltd
6.76% - Citibank Nominees Singapore Pte Ltd

Consensus recommendation
Analyst survey by Reuters
Consensus call: HOLD
Price target: US$0.87

Source/Extract/Excerpts/来源/转贴/摘录: InvestorCentral,
Publish date: 05/10/13

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