05 DECEMBER 2013
How Will Shandong Weigao’s Withdrawal Affect Biosensors?
By Nicholas Tan
Increasing competition in mainland China which is causing a drag on Biosensors’ margin triggered a substantial stakeholder to pull out of the firm. The once darling of the healthcare sector is under immense pressure to reaffirm its position as the third-leading DES player in China. How will this stake sale affect the medical device manufacturer? Could this be the beginning of a privatisation plan in the making?
It almost seems perverse that a firm’s share price would head North with weakening fundamentals, bearish views from analysts on the firm due to intensifying competition in its main operative country and a recent stake sale by a major shareholder. But, this is the case for Biosensors International Group, the medical device firm saw its share price recovered slightly from a downtrend to hit $0.945 on 29 November, from a closing price of $0.855 on 15 November, representing a gain of 10.5 percent for the fortnight.
So the key question here is whether has the bear run for the counter ended, or the recent price retracement is merely a temporary consolidation in the primary downtrend. Judging by the position taken by industry observers, Biosensors is likely not out of the woods and a challenging year lies ahead for it. However, the recent stake purchase by a Chinese government-linked investment fund may be the impetus it needed to pave the way for collaborations and further penetration into the growing Chinese drug-eluting stent (DES) market through acquisitive growth.
Source: SGX, Company Financials
For the first half of FY14 ended 30 September, lower licensing and royalty revenue caused Biosensors’ total revenue to fall 3.8 percent to US$159.7 million. Licensing and royalty revenue for 1H14 was US$22.4 million, down 29 percent caused by a reduction in Terumo’s Noburi DES sales in Japan. However, total product revenue came in 2.1 percent higher due to a new revenue stream from the cardiac diagnostic business.
Gross margin on total product sales was 74.3 percent for 1H14, down from 80.6 percent in the same period a year ago, mainly due to lower gross margin for the firm’s product line coupled with the consolidation of the firm’s newly acquired business unit which has a lower gross margin and the overall reduction in average selling price in China’s DES pricing.
Total operating expenses for 1H14 increased 19 percent due to more marketing activities conducted, higher payroll expenses from a higher headcount due to the new cardiac diagnostic business and increased investment in clinical trial and research and development activities. Finance costs also jumped due to the issuance of US$240 million 4.875 percent four-year notes back in January. As at 30 September, the firm had spent US$51.1 million of the net proceeds of US$238.2 million on the acquisition of Spectrum Dynamics.
Based on the above factors, net profit excluding exceptional items for 1H14 fell from US$57.5 million a year ago, to US$23.6 million. Earnings per share for the half year tumbled from US$0.0334 to US$0.0138.
After posting a poor 1H14 financial report card, Biosensors’ substantial shareholder, Shandong Weigao Group Medical Polymer Company, through its wholly-owned subsidiary, Wellford, announced that it has agreed to dispose its entire 21.7 percent stake in the firm for an aggregate cash consideration of approximately US$312.3 million to CB Medical Holdings. The sale price at $1.05 per share is a premium of approximately 11.7 percent to the closing price of $0.94 per share of Biosensors on 21 November, a day before the announced disposal.
CB Medical Holdings is an investment holding company incorporated in Bermuda with links to CITIC Private Equity (Hong Kong) group. A further search unveils that CITIC Private Equity Funds have investments in a number of healthcare-related pharmaceutical firms such as CP Guojian Pharmaceutical, Youbo Pharmaceutical and Jialin Pharmeceutical. It is also the onshore private equity arm of the Chinese state-owned CITIC Securities, and part of the CITIC Group, a state-owned investment company of the People’s Republic of China.
The sale and purchase agreement is tentatively set to be completed on 20 December, although there is a provisional option for CB Medical Holdings to postpone the settlement date to 28 February 2014. But, we doubt that there will be any complications to the deal as Weigao is eagerly seeking to exit its investment in Biosensors due to an increasingly competitive business landscape for stent in China. According to DBS Vickers, the number of major stent players in China has increased from seven in 2010 to more than 11 now.
Based on a statement released on the Hong Kong Exchange, it is estimated that Weigao will incur a net loss of approximately Rmb449 million on the shares sale. The loss represents the difference between the net book value of interest in Biosensors (as at 30 September) in the amount of Rmb2.4 billion and the US$312.3 million (Rmb1.9 billion) total consideration.
Once the deal is completed, Weigao will reinvest the net proceeds from the disposal into its own business developments, comprising three principal units namely medical consumables, blood purification and orthopedic products. The group has a nationwide sales network and an extensive customer base of over 5,000 healthcare organisations, including 3,000 hospitals and over 410 blood centers.
OCBC Investment Research (OIR) opines that there is unlikely to be any complication in business operations for Biosensors as it has its own established manufacturing facilities, distribution channels and networks in China. Moreover, Weigao’s products do not compete directly with Biosensors nor is it a supplier of it.
Bearish Valuations; Privatisation Option
DBS Vickers maintained their “Hold” recommendation for Biosensors, which was downgraded on 12 August from a “Buy” rating, with a 12-month target price of $0.94. It feels that as Weigao is in a net cash position and it has no urgent need for money, the disposal signals a loss of confidence in the stent business in China.
Furthermore, it remains cautious as the counter is looking at weak revenue growth and margins decline due to lower licensing contribution and average selling prices in China. In addition, it noted that Terumo is now developing its own DES product in Japan for launch next year and will rely less on Biosensors.
OIR kept its estimates intact and maintained its “Sell” rating with $0.80 fair value estimate on Biosensors. Given the recent hike in Biosensors’ share price and with the share now trading at a rich valuation of 20.7 times blended FY14 and FY15 price-to-earnings ratio, OIR believes it is an opportune time for investors to take profits.
Interestingly, both research houses think that the near-term catalyst for Biosensors lies on CB Medical Holdings acquiring further stake in it. OIR went one step further by stating that there might be a possibility of a privatisation exercise on Biosensors if CB Medical Holdings continues to increase its shareholdings.
If a takeover offer does eventually materialise at the price of $1.05 per share, which represents a 14.8 percent premium from Biosensors’ closing price of $0.915 on 2 December, the offer may be too good of a deal for investors to resist considering the overcast hanging above Biosensors. In essence, if you are already vested in Biosensors, it may pay to hold on as the share is trading at a discount to the price paid by CITIC Private Equity.
Publish date: 05/12/13