publish Date: 27 Jul 2010

1QFY11 results above expectations

Earnings vs. our Forecast:

Earnings Estimates:

Dividend Estimates:

Price Target:

Long-term View:

CONFIRMED

Results mildly impacted by weak Euro.

NO CHANGE

NO CHANGE

NO CHANGE

ABOVE

Likely Impact: 1Q DES revenue declined 2%q-q, largely due to the weak Euro during the quarter. Adjusting for FX fluctuations, DES revenue would have increased by 5%q-q, which reflects the growing market acceptance of BioMatrix in existing markets (no new approvals in the quarter). Gross margin for interventional cardiology (DES and other related products) remains robust at 77% despite the FX weakness.

Good momentum in France, sales weighted towards 2H. Management highlighted that BioMatrix has achieved a 5% market share in France over 6 months, which we think is commendable given that it is distributed through Biosensors' own sales force. We believe the growth momentum in France will continue, supporting management's guidance that sales growth will be weighted towards 2HFY11.

Positive surprise from Nobori. BIG's royalty revenue was up 153%y-y/24%q-q, underpinned by Nobori sales outside of Japan (ex-US), exceeding our forecast by 20%. Relative to BioMatrix, we understand that Nobori has been relatively slow in its initial ramp-up when it was approved in 2008. In our view, Nobori's strong results this quarter suggests that it is beginning to gain market traction, which bodes well for its impending approval in Japan.

Strong performance by JWMS. 1Q JV contributions met 30% of our full year forecast; the outpeformance was driven by JWMS' strong revenue growth of 45%y-y, which reinforces our positive view on the Chinese stent market. Net margin has also recovered to 48% from 27% in the previous quarter. Management remains cautious on its guidance for the approval of BioMatrix in China.

US restructuring: one-off charge of US$6mn. The group has closed its US operations (mainly R&D) and made a one-time provision of US$6mn, which mainly includes severance and personnel costs. Going forward, BIG will be consolidating its R&D efforts in Singapore, which involves the relocation of its key R&D personnel in California. The group expects to save US$4~6mn/year starting in FY12.

Revenue guidance unchanged despite weak Euro. Management maintains its product revenue (ex-royalty) guidance of US$135-145mn in FY11 despite the weak Euro. We remain conservative and maintain our forecast of US$133mn, leaving room for potential upside.

P

Benefiting from Nobori's impending launch in Japan

We highlight key excerpts from Motoya Kohtani's Terumo flash note, Positive Findings in Nobori trial data (2 July 2010):

Positive data on Nobori Japan and Nobori 2. We turn our attention to findings in the trial data for Nobori Japan (for approval in Japan) and Nobori 2 (post-market surveillance in Europe) drug-eluting stents (DES), which were announced by Terumo at the EuroPCR event on 25 May. Nobori Japan was evaluated in trials over a one-year period for non-inferiority in safety and efficacy compared to Nobori and Cypher, which is made by a rival company. Nobori Japan was proven to have similar target vessel failure (TVF), the primary end point, as Cypher. The retreatment rate due to vascular restenosis was 0.5% for Nobori Japan, a significant difference to the 3.9% for Cypher, and there were no cases of late stent thrombosis. We think these finds represent a major step toward the approval of Nobori in Japan. Post-market surveillance for Nobori 2 hinted at the competitiveness of Nobori, in that the rate of major adverse cardiac events (MACE) was 3.7%, a significantly lower level than that for other DES, including off-label treatments that included critical thrombosis, a condition that Nobori does not target.

Nobori drug-eluting stents likely to take off from FY12 (March-end).

(See note: http://www.nomura.com/research/getpub.aspx?pid=379426) We raise our long-term sales project for Nobori in light of the favourable findings in trials. We now assume that Nobori will be approved for sale just before end-FY11 (Mar 2011), or soon after the start of FY12, earlier than we previously thought. We expect domestic sales of Nobori to amount to Yen4bn in FY12, considering the product's superior performance and because it will be the first domestically produced DES. We look for a rapid proliferation to ensue, but its spread could be undermined by high prices set due to a high royalty ratio. We expect Nobori to capture a 20% share of the domestic market over the long term.

Biosensors' licensing agreement with Terumo. Under a licensing agreement, Terumo has the right to produce and market Nobori, which shares similar technology with BIG's BioMatrix, in geographies outside of the US and exclusively in Japan for a timeline of 5 years from the product launch. Biosensors enjoys payments from Terumo amounting to an undisclosed percentage of Nobori revenue ("X") globally (ex-US and Japan) and a different percentage ("Y") in Japan. "X" has been revised downwards previously with an upfront payment of US$40mn in Q109 while "Y" has remained the same since the agreement signed in 2003. In this regard, we believe Biosensors is well-positioned to benefit from Nobori's potential launch in Japan, where Terumo is a dominant player.

Reiterate BUY - earnings under review. We are currently reviewing our earnings estimates in light of this positive development and the negative impact from EUR.

Valuation Methodology and Investment Risks:

Note: Ratings and Price Targets are as of the date of the most recently published report (http://www.nomura.com/research) rather than the date of this email. We value Biosensors on a SOTP methodology- DCF for is base business, Terumo royalties and BioMatrix (9.7% WACC), 9.2x exit P/E to account for DES business valuation. We value its 50% stake in JWMS at 22x P/E. Key risks: i) High exposure to weak EUR; ii) Stent pricing pressure in China.