References

 

BioMatrix.Biosensors booked maiden sales

Tectonic operational restructuring

operations and cut redundancy, Biosensors will be closing down its Newport

Beach manufacturing facility in the US and has plans to divest or cease

operations in Occam located in Netherlands (currently producing older

Axxion stent model). All of its manufacturing functions will be shifted to

Singapore to capitalise on its lower cost base. However, Biosensors will

retain its R&D function and a corporate office in the US. Management has

indicated that the reduction in operational expenses of US$7-9m/year will

be ploughed back into R&D.. In a bold move to streamline

Critical China piece.

Weigao remains a crucial piece in Biosensor's earnings forecast of US$100-

115m for FY09 and beyond. Management has assured us that it is in both

party's interest for the sale to go through as Biosensors would be able

better able to bring JWM into its next phase of growth with technology

transfers.The full acquisition of JW Medical from Shandong

Turnaround story

contribution from JWM, restructuring to cut redundancies, good

management in place and lower cost based productions in Singapore and

China, we urge investors to view their investment options in Biosensors

with a longer term horizon.. With a massive ramp up in BioMatrix sales, positive

Ruminating valuations

strategic roadmap and has executed its plans well so far. Also, in a strong

show to ensure good operational execution, Biosensor's CEO will now be

based out of Singapore. We use a standard medtech valuation methodology

by discounting its first year of substantial profit in FY10 to present day

value. Our fair value stands at S$1.04. Maintain

Section 1: FY08 results overview

Improved results.

in revenue to US$44.3m as product sales rose 14% and it started to reap

licensing revenue. It remained in a loss-making position but that narrowed

17% to -US$30m. Average product gross margin came in slightly lower at

39% (vs. 41% in FY07) due to delays in moving operations to China and

inventory write-offs. The results were in line with our expectations.For its FY08 results, Biosensors reported a 29% increase

Iteration of guidance.

revenue in FY09. The revenue guidance is dependent on the full acquisition

of JW Medical (JWM) in China. On a stand alone basis, Biosensors is

expecting to make US$65-75m in FY09 revenue, almost a doubling of its

FY08 performance. Pushing the guidance envelope further out to three

years, Biosensors is expecting revenue of about US$250m in FY11.Management has guided for US$100-115m of

Getting into the black.

return to the black in 4QFY09, we take a more conservative stance and

assume a return to the black in 1QFY10. Our stance is based on inherent

risks of execution in this critical year of transformation from being a solely

technology oriented company into an efficient manufacturer of stents. Again,

assumptions are contingent the full acquisition of JWM.Although management is guiding that it would

One-time charges in 1Q FY09.

of one-time charges in relation to streamlining its operations in New Port

Beach, USA and Eindhoven, Netherlands. 4QFY08 incurred a charge of

US$3.7m for write down of inventories in its Netherlands Occam facility

while 1QFY09 will record another US$3-4m in restructuring charges. Overall,

the consolidation will reap about US$7-9m/year in operational savings and

this is expected to be ploughed back into R&D.

Section 2: Leaner strategic roadmap

BioMatrix sales and clinical interest.

of US$1.7m from its BioMatrix DES after it sold some “pre-launch” units

during 4QFY08. Though sales is currently insignificant, clinical interests

displayed at the recent EURO PCR conference in May 08 was described

as “overwhelming” where attendance at its symposium was reduced to

standing room. We view this intense interest in Biosensor’s technology at

such key clinical events as a harbinger of healthy sales of BioMatrix.Biosensors booked maiden sales

Leaner and better.

Investigational Device Exemption (IDE) procedures. As such, Biosensors

will take a strategic step back from its aggressive penetration into the US

and focus its energies on the markets in the EU and Asia. In three years,

the company is targeting a 10% market share in the EU (about US$160m)

and 30% market share in China (about US$120m). Assuming the DES

market grows annually at a very conservative 20% from its current size of

US$1.6b in the EU and US$0.4b in China, the total addressable market

share in these 2 geographies would be about US$2.4b. If executed as

guided, this could translate to a possible topline of US$483m in FY11 for

these two markets alone.The US FDA has revealed new refinements on its

Not out of US completely.

fulfil its regulatory filing obligations to its licensees Devax and Xtent.

Biosensors will still retain its presence in La Jolla, USA, which is a hotbed

for technology innovation, to evaluate its technology, product and regulatory

positions. We do not rule out Biosensors’ partnering other companies to

bundle technologies/products for a more holistic offering and a more

defensible position.

Section 3: News flow from major medical conferences

Competing with hard core data.

understands that the bigger, better branded and more well-capitalised

competitors in the market will come out with all cylinders firing to quell any

competition. Thus, we think that it has taken the right path to competing in

this space with well designed and statistically significant clinical trials.We think that Biosensors fully

Continuous proof.

from the industry thus far, Biosensors is not sitting on its laurels and has

embarked on registries in Asia (BEACON II, 1000 patients) and in the EU

(E-BIOMATRIX, 5000 patients) that started recruitment in Mar 08. Unlike

clinical trials, registries are not designed to fare against another competing

product but involve paying patients who are willing to be tracked over a

certain period of time. We think that its embarkation on such extensive

registries in two different markets is a display of a strong show of confidence

in the long term outcome of its BioMatrix DES.Despite obtaining data that heralded positive comments

LEADERS trial.

against J&J’s sirolimus eluting Cypher DES, to be presented at key clinical

conferences like ESC (Aug 08) or TCT (Oct 08). Although no indications on

the results have been announced, we got positive vibes from management.

This news flow may be a positive stock price catalyst

Section 4: Alliances

Terumo

A tricky piece.

the view that Biosensors’ relationship with Terumo will be one of the key

factors in the magnitude of its earnings acceleration. The conundrum now

is that Terumo has a non-exclusive distribution right (excluding Japan and

the US) to sell its NOBORI DES (uses Biosensors’ technology) where

Biosensors is also pursuing sales of its BioMatrix DES in the same region.

Terumo has a wider marketing footprint while Biosensors is limited in this

aspect but may make up for it via the depth of its relationships with clinicians.Other than its full acquisition of JWM, we continue to hold

Think win-win.

for Biosensors as regardless whether Biosensors or Terumo creates the

sales channel into any clinical centre, Biosensors would be able to reap

the benefits. In fact, we think that the increased “friendly competition” of

these two companies for sales would work to push other competitors out

of these centres. Terumo’s recent revision of its licensing agreement with

Biosensors to lower revenue sharing but pay an upfront also indicates that

they are committed to pushing their NOBORI DES out strongly.We think that this relationship will form a win-win situation

About relationships and revenue.

nature of its size and length of time in the market, would probably have a

wider marketing and relationship footprint than Biosensors. However, we

also note that Biosensors were the ones who initiated the trials in the EU

and have deep relationships with key opinion leaders in the field. During

the FY08 results update, management also indicated that there has been

a ramp up of experienced sales personnel that were previously from other

medical device companies. As such, we think that Biosensors will not be

too heavily disadvantaged in its direct sales efforts in the same EU playpen

as Terumo.

Xtent and Devax

US mid-cap medtech stocks take hit.

value adjustment in its 4

of warrants to purchase shares of a licensee (Xtent) as required by

accounting standards. This line item was non-cash in nature and is just a

reflection of the market value of Xtent.

Devax laying low.

investigator of the BioMatrix DES, is also the lead investigator for the Devax

AXXESS stent which caters to bifurcation conditions. Collectively, Devax

said in a pre-IPO filing that treatment of these bifurcation lesions results in

approximately 1m procedures per year. We recently interacted with Prof

Grube during the Singapore LIVE medical conference and gained positive

indications from him with regards to the Devax stent that utilises Biosensors’

Biolimus A9 drug and its biodegradable polymer.Leading cardiologist Eberhard Grube, who is the lead

What next for licensees?

facility, Biosensors will continue to work to fulfil its obligations but will now

only sell the Biolimus A9 drug to its licensees. Its licensees will now be

transferred the technology know-how for the formulation and coating of the

drug and biodegradable polymer for their respective stent platforms. This

resolves most operational issues of catering to the needs of its licensees.In effecting the closure of the Newport Beach

JW Medical

Critical China piece.

Weigao remains a crucial piece in Biosensors’ revenue forecast of US$100-

115m for FY09 and US$250m in FY11. Discussions with management have

yielded positive feedback on the progress of the acquisition and we have

assumed the full acquisition of JWM by July 09.The full acquisition of JW Medical from Shandong

Think win-win again.

this acquisition through. On one hand, Biosensors would gain an effective

entry into China’s booming DES market through JWM’s network and utility

of a low-cost manufacturing base. On the other hand, despite JWM’s Excel

Stent continuing to draw good reviews and strong sales, we think that

incorporating Biosensors’ technology and know-how will better equip JWM

to compete against current market leaders Microport ang JNJ.

No questions on reputation.

shareholders, we are reassured that it continues to attract strong institutional

investors with Medtronic being the single largest shareholder. This helps to

reinforce our thesis that Biosensors and Shandong Weigao’s management

will bring to the regulatory authorities a strong and credible case for the

JWM acquisition.Taking a look at Shandong Weigao’s

SFDA and China’s priorities.

its second catastrophic natural disaster after the snow storm in early 2008

and is also in the midst of preparing for the Olympics. Although state

agencies continue to operate, we think that priorities are being diverted on

all fronts in order to prepare the entire country for a significant year of 2008.

As such, we think that some delays in processing the full acquisition

approval might occur in the run up to the Olympics. However, management

has continually emphasised that it will not be passively resting on its laurels

waiting for the approval from authorities. Although it did not give details,

CEO Michael Klein has indicated that he has alternative plans to push

ahead in China should the full acquisition of JWM prove too stumbling.Evident from the news, China is now handling

Registration with SFDA.

requirement for foreign medical device companies. Roughly, it adds up to

about 82 working days for a new registration to run through the three offices

that are involved in the medical device registration process. However, it

may take up to double or triple that time for a successful registration due

to government inefficiencies. New regulations have also been implemented

by the SFDA to improve safety checks on drugs and medical devices that

may slow the process. However, our mention of Shandong Weigao and

Biosensors’ good reputation may work to help in the process.

Lower cost base.

Critical Care Products (CCP) Unit from Shandong Weigao on 8 May 08.

The slight delay caused a drop in gross margin for its CCP for FY08 but we

expect that the full porting over of manufacturing to eventually yield stronger

margins as it operates out of a lower cost base.

Section 5: Industry trends

Sustained investment interest in stents.

20 venture capital deals announced by companies developing stents or

stent-related products, totaling about US$320m. In Apr 08, two more deals

were announced with IDev Technologies raising US$25m and Tryton Medical

raising US$14m to further bring their stent technologies closer to market.

In Dec 07, REVA Medical raised US$42m from a bevy of high profile

investors, including Cerberus Capital and Medtronic.Since 2003, there have been

Easing regulatory restrictions in UK.

agency that governs medical device usage in the UK, National Institute for

Health and Clinical Excellence (NICE), issued a statement on a possible

withdrawal on DES from its state health system due to the lack of data

supporting its benefits vs. its higher costs. However, in Feb 08, these fears

were alleviated when NICE issued a new statement endorsing the use of

DES as long as it is not more than £300 than a BMS. UK government data

has indicated that the average DES price is about £529 vs. £131 for BMS.

For Biosensors, we think that it will be able to offer a competitively priced

product to meet this requirement due to lower cost base of production in

Singapore.Sometime back in Aug 07, the

Big boys problems.

competitors like Boston Scientific (BSX) and Johnson & Johnson (JnJ) are

positive for the company. As an overview, BSX continued its bottomline

compression due to its US$7b debt situation after its acquisition of Guidant

while JnJ is still at the back of the pack in terms of new innovations to fill its

DES pipeline after its Conor COSTAR DES stent failed to meet end goals

in May 07. Capitalising on its alliance with Terumo, we think Biosensors is

in a good niche position to acquire market share with its Biomatrix DES

platform.Recent corporate reports on Biosensors’ main

Fertile grounds to boom.

DES space, especially with its recent CE mark inducing intense interest

from a clinical community that is pining for a safer next gen device. As can

be seen from VHA’s Goodroe data, the utilisation of DES in stenting cases

seems to have started its turnaround in Dec 07 as more positive clinical

data presented highlighted the case for using DES vs. its low risk. Although

this is US data, we deem that the Rest of the World will mimic this trend

as the US continues to be a trendsetter in the medical device space.

Biosensors remains one of the only companies in this technology space

that operates in a low cost base along with fully owning the entire pipeline

of Intellectual Property ranging from its delivery system, to the biodegradable

polymer and proprietary drug Biolimus A9. Even BSX has to license its

Paclitaxel drug from another listed Canadian company, Angiotech.

Improving revenues from Big Boys.

and JNJ to obtain a gauge on the performance of their DES sales. As

indicated below, we see that both the companies are generally recording

improving QoQ revenue in various territories for their stent businesses. We

use their improving performances as the two largest stent manufacturers in

the world as a reflection of the better prospects for DES makers like

Biosensors with next-gen products.

Section 6: Risks

Bad clinical data.

data is low, we do not discount the possibility of it failing to meet

expectations. Should the LEADERS trial fail to meet clinician expectations

against J&J’s Cypher stent, Biosensors’ earnings and share price might

be at risk.Although the current likelihood of bad LEADERS trial

Aggressive price undercutting.

US$54m with an expected topline of US$100-115m in this financial year. In

the light of much bigger competitors like J&J (FY07 sales: US$61.1b, Cash:

US$7.8b) and Medtronic (FY07 sales: US$13.5b, Cash: US$1.1b) with a

stronger financial positions, aggressive price cuts to drive smaller companies

out of business could occur. Biosensors might not be able to meet

profitability guidance should a price war break out for a sustained period of

time.Biosensors’ cash reserves are about

Overly intense competition.

entered into this space and technology innovation has been moving at a

breakneck speed. Should new or established cardiology companies put

out a better and safer technology into a stent, Biosensors might not be

able to compete effectively.We acknowledge that many companies have

Bad execution.

in place to bring Biosensors into the next phase of growth, unforeseen bad

execution situations in China or Singapore manufacturing plants could be

its undoing. Slower than expected sales force infrastructure ramp up in its

many approved markets can also be a drag.

Section 7: Valuations and key drivers for Biosensors

Enough cash for 2 years.

agreement, Biosensors has settled for US$40m in upfront cash. Although

it will be recognised over a period of five years (about US$2m/quarter), the

full US$40m will be transferred to Biosensors at one go. With the current

US$54m in cash equivalents and an estimated burn rate of about US$40m/

year, we do not expect Biosensors to require any fund raising in the next

two years.With the revision of the Terumo licensing

Turnaround story.

contribution from JWM, restructuring to cut redundancies, good

management in place and lower cost based productions in Singapore and

China, we urge investors to view their investment options in Biosensors

with a longer term horizon.With a massive ramp up in BioMatrix sales, positive

Ruminating valuations.

strategic roadmap and has executed its plans well so far. Also, in a strong

show to ensure good operational execution, Biosensor’s CEO will now be

based out of Singapore. We use a standard medtech valuation methodology

by discounting its first year of substantial profit in FY10 to present day

value. Our fair value stands at S$1.04. Maintain

Appendix 1: Info on COURAGE trials

Confusion in the midst of COURAGE.

looked at 2,287 heart patients who suffer from chest pain (angina) but who

are otherwise considered low-risk for heart attack, and concluded that the

addition of stenting to optimal drug therapy resulted in no significant reduction

in heart attack or death. This set off a media firestorm of misinterpretation,

causing confusion for patients and physicians. We found a balanced

interpretation of the COURAGE trials and present it here in our report:

1. The five-year COURAGE study,Can angioplasty and stenting save lives? In the case of a heart attack,

angioplasty definitely saves lives

COURAGE trial does not apply to patients who are having a heart attack;

2.

patients with advanced disease who are at risk for heart attack (Acute

Coronary Syndrome) — angioplasty and stenting have been proven to be a

significant therapy for these patients;

3.

not revolutionary, but instead are consistent with current practice guidelines

from all major professional groups (AHA/ACC/SCAI) that recommend using

angioplasty and stenting only after medical therapy has proven inadequate;

4.

chronic stable angina are, in fact, at low risk for death or heart attack —

stents in these patients are not intended to prevent death, but to relieve

pain and improve quality of life.

5.

still a proven treatment option for those whose “quality of life” (angina or

activity level) is not improved by medical therapy, or for those patients who

do not tolerate the side effects of medical therapy;

6.

did show that the scores for physical limitation, angina frequency, and

quality of life were significantly better for patients in the angioplasty group;

in fact,

angioplasty during the course of the trial because their angina was not

relieved by medication alone;- many studies have proven this; theDo stents have proven value? COURAGE also does not apply toWill this trial change medical practice? The results of COURAGE areWere the patients in this trial at risk for heart attack? Patients withShould people with chronic stable angina get stents? Angioplasty isDo stents and angioplasty make people feel better? This initial report1/3 of the patients in the medications-only group switched over to

7.

to be as safe as medical therapy;

8.

chronic condition — lifestyle changes, medications, stents are ways of

managing the disease and relieving symptoms, but they do not “cure” the

disease;

9. Did all the patients in this study experience relief of chest pain?

No. In the COURAGE study neither therapy completely eliminated angina

for more than a quarter of the patients. This maybe due to the fact that the

COURAGE patients with stents had Bare Metal Stents (BMS) which may

have a higher rate of restenosis.

10. Have patients with stable angina been given stents unnecessarily?

Under current practice guidelines, it is recommended that patients with stable

angina first be given a trial of medical therapy, along with lifestyle changes

and risk factor reduction. They are candidates for stents if they continue to

experience problems. What is unknown is how often these guidelines have

not been followed, and whether cardiologists have in fact recommended

stents as a first treatment option for this patient population. There is significant

controversy as to how often this occurs. Estimates of how many angioplasty

procedures are done in patients with stable coronary artery disease range

from 25% to 85%.

Appendix 2: China’s healthcare trends

Booming trends.

device imports and exports in China actually exceeded US$10b for the first

time in history in 2006, with exports growing nearly 29% YoY. China could

have stated a total import/export medical device market of over $10b while

most industry reports value the Chinese medical device market at around

US$1 - 3b due to market division methodology.Medtech Insight indicated that the total value of medical

2 parallel markets.

into two fairly parallel segments: high-end devices and low-end devices.

The high-end segment is dominated by a few large MNCs, while the lowend

includes a horde of about 3,600 domestic Chinese medical device

companies. In terms of market value, the high-end occupies only about

10% to 20% of the market while the other 80% to 90% is still predominantly

filled by cheap medical devices with minimal advanced technologies.

However, market growth is nearly twice as high in the high-end market

(about 20% YoY) compared to the low-end. As a result, it is usually the

low-end segment that is neglected when calculating the total market value.The Chinese medical device market can be separated

Rising healthcare expenditure.

continues to grow in absolute terms although as a percentage, it hovers

around 4.5-5% of GDP. If China continues to spend about 4.7% of its GDP

for healthcare expenditure in 2006, we are seeing a CAGR (2000-2006) of

14% growth. This bodes well for Biosensors as it enters this market with

an established Chinese partner in JWM.China’s spending on healthcareAre stents safe? In the COURAGE trial, angioplasty and stenting provedDo drugs or stents cure heart patients? Coronary artery disease is aManagement has shared in greater detail itsBUYAlthough we are confident of the new executive team putWe compiled the data from BSXWe think that Biosensors is inch perfect in theBiosensors recently completed its acquisition of theWe obtained a simplified workflow of registrationWe feel that it is in both parties’ interest to pushBiosensors took a negative fairth quarter when it booked the decrease in fair valueWe mentioned above that Terumo, byWe expect data from its 1700 patient trial, which is pittedWe note that Biosensors will still continue toManagement also gave a clear guidance. Management has shared in greater detail itsBUY.