Biosensors International facing rising risks to licensing revenue

Long-term potential also becoming cloudy.

Here's the full company analysis from Maybank Kim Eng:

Not time for re-entry, Maintain Hold. While share price is at 24% off its 52-wk peak of SGD1.42, we flag further risks in licensing revenue from Terumo which could cap share price recovery. More aggressive marketing efforts for Nobori stent in Japan could result in higher distribution cost. We cut FY3/14F-16F net profits by 6-7% as we raise our distribution cost assumptions which were too conservative. Not time for re-entry, maintain Hold, SOTP-based TP trimmed to SGD1.17.

Terumo developing in-house DES. We note in Terumo’s “The New Mid-Term Plan (FY2013 – FY2016)” dated May 2013 that a new Drug Eluting Stent (DES) was introduced in its product pipelines. Based on our checks, a clinical trial has been initiated by Terumo for a new DES named “Discovery123/TCD-10023”, which is expected to be completed in 2014. We believe that this could be the same DES mentioned in Terumo’s plans. We suspect that this is intended to eventually replace the Nobori DES once the licensing agreement with Biosensors expires in 2016. We believe that Biosensors had foreseen this and this could be the part of the reason why it is building up its own sales team in Japan. Licensing income from Terumo accounts for ~15% of FY3/14F revenue but ~45% of net profit. Our TP has been substantially lower than consensus as we valued licensing based on DCF only until 2016.

Hard to quantify long term potential. Biosensors has a sound business strategy to transform into a multi-product platform and we recognise the long-term potential that could arise if it is successful. The company has been buying back its shares during the price decline, affirming their confidence. Biosensors still has over USD500m in cash which we believe is mostly earmarked for acquisitions. However, given the difficulties in quantifying the long-term potential and risks from M&As without more clarity, we have been holding back our optimism.

Maintain Hold, await positive catalysts. We think that share price appreciation in the near-term may still be capped despite the price decline due to the mentioned risks. Norges Bank and Atlantis Capital have recently trimmed their positions with the former ceasing to be a substantial shareholder. Maintain Hold, with TP reduced to SGD1.17. We await value accretive M&As as potential catalysts for upgrade.