UBS Investment Research

Bors International Group

T ime to revisit-impending CE approval

�� CE approval expected in Jan; acquisition of JW Medical

Biosensors announced on 26th Dec that it expects CE approval for its flagship

Biomatrix stent by end of Jan. 08. It also announced today that it is acquiring

balance 50% stake in JW Medical. Total consideration for 100% of the company is

about US$210m at an estimated P/E of under 14x (mostly payable in shares). We

believe this helps Biosensors to strengthen its presence in China.

�� Biosensor?s stent may solve the industry?s biggest concern: LST

Late stent thrombosis (LST) is a key issue that the Drug Eluting Stent (DES)

industry faces today. With Biosensor?s unique biodegradable polymer, and clinical

trials which indicate nil LST rate, the company could get a large share of the stent

market. We note however, larger trials are required to verify data provided thus far.

�� Targeting Asian market, potential M&A target

JW Medical, has a 25% share in China. Existing royalty agreement with Terumo,

acquisition of PT Fondaco and recent MOU with PT Kimia Farma will also help

the company market its product in Asia and Europe. Biosensors could be an

attractive acquisition target after it gets the CE mark and longer term trials confirm

data from smaller trials completed so far.

�� Valuation: S$1.25

Our DCF valuation is based on a COE of 11.5% and terminal growth of 2%. We

have assumed Biosensors to secure an 8% market share by FY 14. Our target

valuation of US$810m is a 38% discount to acquisition price paid for Conor (a

similar company to Biosensors) by Johnson & Johnson in Nov-06.

Time to revisit-impending CE

approval

We believe the expected impending CE approval for Biomatrix stent could take

the share price to between S$1-1.25 and thus provides opportunity for near term

gains. Current market cap of Biosensors at about US$620m (excluding 129m

shares paid for 50% acquisition of JW Medical) compares lightly to acquisition

of Conor by J&J for US$1.3b in Nov-06. We would recommend buying the

stock for near-term gains currently. Beyond the expected near-term gains, we

believe stock value can be unlocked by: 1) being acquired by a large medical

device company, and 2) good results from large clinical trials which would be an

additional catalyst for the stock.

Catalysts

announcing positive data from larger trials starting as early as this February and

announcement of further marketing tie ups in other populous countries such as

India. An acquisition offer from a large medical devices company could provide

the biggest upside.for the stock would be announcement of CE approval this month,

CE approval will be an important turning point for the company:

believe it may be time to revisit Biosensors as the stock has suffered on account

of delayed CE approval and negative industry newsflow (challenging safety and

efficacy of Drug Eluting stents). However, according to a press release by the

company dated 26

sometime by late January ? i.e., within the next 2-3 weeks. Also, more recent

clinical trials suggest that the drug eluting stents are safer than previous trials

suggested.Weth December, 2007, it expects to receive its CE approval

Biosensor?s biodegradable polymer is key:

has not been positive, we believe with Biosensor?s unique biodegradable

polymer, it could quickly grow its turnover once receives its CE approval.

Significantly, Biosensor?s biodegradable polymer could be a potential solution

to late stent thrombosis (LST), experienced by patients who use drug eluting

stents (DES).While industry newsflow overall

Acquisition of JW Medical

for about US$210m at a P/E of slightly under 14x. This will result in 31%

addition to Biosensor?s outstanding shares but also bring in profit contribution.

We believe this acquisition is overall positive as Biosensors is focussed on the

Asian market which could have high growth rates over the next few years for the

stent market, unlike the developed west where the market could stagnate or

decline somewhat.: Biosensors announced acquisition of JW Medical

Valuation and upside:

share price to reach between S$1-S$1.25 and including some premium as an

acquisition target, our price target of S$1.25 could be reached relatively near

term. We note that Biosensor?s current market cap of ~US$620m (excluding

recent US$88m increase due to JW acquisition) compares lightly to US$1.3b

paid by Johnson & Johnson for acquisition of Conor (for a similar product) in

Nov-2006

About JW Medical

JW Medical was owned by Shandong Weigao, a leading manufacturer of singleuse

own branded medical devices. Shandong Weigao will be invited on the

Board of Biosensors and offered one seat. JW Medical is a drug-eluting stent

manufacturer based in Weihai, Shandong Province in China. It has received

Chinese State Food & Drug Adminsitration (SFDA) regulatory approval for its

Excel drug-eluting stent in Jan-06. According to the company, it currently has a

market share of 25% in the Chinese DES market with net profits of US$11.1m

and gross margins of atleast 75%. The company indicated that the average

selling prices of Excel is at about RMB 11,500 (cUS$1,575) compared to

imported stents from J&J for example being priced at about RMB 25,000

(cUS$3,425). Biosensors indicated that it hopes to capitalize on JW Medical?s

manufacturing facilities and capacity should the need arise. The company also

indicated that JW Medical may spend about 10-15% of its turnover for its

clinical trial program. JW Medical has also indicated that 6 months results of its

CREATE registry demonstrate the safety and efficacy of its Excel stent. The

study involves 2,077 patients in China and three other countries in South East

Asia. MACE at six months was recorded at 1.4% for this study.

Impacted by delayed CE approval & industry newsflow

The stock has been de-rated primarily due to delayed CE approval and some

negative industry news flow. We believe receipt of the CE approval could

provide a near term fillip to the share price:

Industry newsflow from late 2006 to early 2007 was dominated by concerns

over safety & efficacy of Drug elution stents (DES), this lead to worldwide

decline in DES sales. However some recent studies have suggested better safety

profiles for DES than initially feared; this could help pacify the initial concerns

and possibly help a recovery. Nevertheless Biosensors needs to be able to

encash on its product quickly before the next generation of stents are launched.

1) In March last year, results of COURAGE trial indicated that stents were

not really effective in reducing mortality rates and merely helped

patients to lead a better life style (lesser chest pains for example). Thus

patients could have similar mortality rates merely based on drug intake.

This led to a drop in stent utilization rates given the cost of stents.

2) Sep 2, 2007 ? (SCAI) Society for Cardiovascular Angiography and

interventions announced ?drug eluting stents are not dangerous?. The

results were based on (SCAAR) Swedish Coronary Angiography and

Angioplasty Registry which involved study of 13,000 patients for 4

years. The initial results from the same study published in 2006 had

caused major concerns over DES by reporting a 18% increased chance

of deaths among patients getting DES.

3) Oct 3, 2007 - A study funded by Ontario Ministry of health, the

Canadian Institute of health and other medical groups studied records of

over 7,000 patients treated with DES. The study concluded that patients

treated with DES were less likely to die or need repeat procedures

compared to BMS cases. These results are in direct contrast to the

COURAGE trial mentioned earlier.

Further tests confirm safety of Biomatrix stent

Biosensors released trials data on its Biomatrix stent on 22

term data inspires confidence in safety of the stent. The study includes findings

Table 2: Biomatrix trial results

Company Product Patients Period MACE Stent thrombosis

Biosensors BIOMATRIX 120 36 mths 10% 0%

Biosensors BIOMATRIX 120 24 mths 6.5% 0%

Biosensors

Source: BiosensorsBIOMATRIX 120 12 mths 5.1% 0%

12-month data from the BEACON study indicated that it achieved its primary

endpoint with 2.1 percent of target vessel revascularization and a 6.5 percent

MACE rate over 180-day period and based on our conversation with the

company, we understand that there was nil rate of stent thrombosis even for the

Beacon registry. Target vessel revascularization measures any clinically-driven

repeat percutaneous revascularization or surgical bypass of the original target

lesion or any segment of the coronary artery containing the target lesion.

Biodegradable ? potential solution to late stent

thrombosis?

The debate over DES is about the relative long term safety of these devices

compared to bare metal stents. More specifically, these concerns relate to LST,

a sudden clotting of blood in arteries, which at times can lead to incidence like

death or heart attacks. While the cause of LST is not well established, the usage

of durable polymers is increasingly being highlighted as the possible culprit.

This is because DES are similar to BMS except for the drug and polymer coated

on to the BMS. However, as the Drug is eluted in the first six months and LST

occurs much later, the only difference between the DES and BMS is the polymer

and thus it is hypthesised that the polymer could be the key reason for LST. This

would imply stents with biodegradable polymers or biodegradable stents may be

preferred as they manage to solve the restenosis problem caused by BMS and

potentially solve the LST problem caused by most DES. Restenosis is narrowing

of arteries caused by an over-healing process after a metallic stent (recognized

as a foreign object by the body) is put in place by doctors. This over healing

leads to narrowing arteries which defeats the purpose of inserting a stent in the

body, which is to keep the arteries open.

Biosensors? unique stent with biodegradable polymer;

limited competition near term

The Biomatrix stent uses company?s proprietary S-stent platform, its FDA

approved Biolimus A9 drug and a biodegradable polymer. Conor?s stent,

?CoStar? was the only other commercially available bioabsorbable polymer

based stent. The product was withdrawn from market after long term clinical

trials data failed to support the positive results of earlier trials.

?ABSORB? (from Abbott Laboratories) is a fully biodegradable stent currently

under development. The initial trials for ABSORB confirm higher safety of

biodegradable stents, however we do not expect it to be commercially available

till 2012. While fully biodegradable stents are still at very nascent stage,

biodegradable polymer based stents might provide a potent solution in near term.

Biosensors as an acquisition target

As stents require intensive research and regulatory approvals, the development

cycle is prolonged over years, thereby a readily marketable product commands

attention. As noted, J&J acquired Conor in Nov, 2006 for US$1.3b, primarily to

gain its CoStar stent (a similar product). At the time CoStar was approved in EU

but was pending US FDA approval. However, in May 2007 clinical trials for

CoStar failed to support the findings of its short term trials, consequently the

FDA application was withdrawn and the product was discontinued.

M&A premium could be smaller for Biosensors as

compared to that for Conor

1. It is possible that Conor?s US$1.3b acquisition price was not just for

biodegradable polymer stent but also its unique stent design which could have

other applications.

2. Conor?s stent did not meet primary end points in large trials eventually

(though this could not have been known earlier) ? which led discontinuation of

the stent. This implies potential suitors for Biosensors will tread cautiously

before offering billions for a product before large clinical trials confirm the data

from the existing trials done so far.

Figure 1: Restenonis rates

Source: SCAAR study (Swenska Coronar Angiografi ? och Angioplastik Registret)

3. Market size has shrunk in US/ Europe due to questions on safety/efficacy.

Safety issues for DES are perhaps being addressed with larger trials but we

believe the restenosis rate differentials between BMS and DES is narrowing (see

chart above for recent data indicating just 8% restenosis rates ? as BMS

Product development

Table 3: Selected product pipeline from major players

Company Product Approvals Commercialization

Medtronic

expected within CY 2007

Expected in US markets in early 2008, Japan by 2009

Endeavor Resolute CE Marked Oct 2007, FDA

approval expected in FY10

Expected launch within CY07, target sales of 100,000 units in first 30

days

Edeavor Sprint CE Marked Expected US launch in 2H 08 - 1H09Endeavor CE marked, FDA approval

JNJ

08 PMA submission in H2 2011Cypher ELITE Human trials to begin in 1H

Abbott

approval anticipated Expected US launch In mid 2008, Japan by 2009

ABSORB None Positive 12mth data on 30 patients, but no commercialization in near

future; stent being reworkedXIENCE CE Marked, US FDA

Boston

Scientific

CY08

TAXUS Liberte CE Marked To be launched in US

PROMUS element NA Under research, design expected to freeze by Q1 2008

Source: respective company data, UBSTAXUS PROMUS CE marked Launched world wide (other than US), US launch expected in mid

Increasing marketing and distribution network:

China, India and Indonesia

Biosensors has been taking a series of measures to improve its distribution

network. It already has a royalty agreement with Japan based Terumo. We

believe Terumo can provide Biosensors with a distribution network in

particular and also in other parts of Asia and Europe. Additionally, in

company has acquired a 50% stake in JW Medical and proposes to acquire the

balance 50%. We understand JW is one of the largest suppliers of stents in the

country. Further, Biosensors also announced an MOU with P.T. Kimia Farma, a

state owned

coronary bare-metal stents and accessory products with the aim of supplying

these as choice coronary products to local government hospitals in Indonesia. In

October, it also announced acquisition of PT Fondaco Mitratama?s distribution

network (consideration for which was 5m Biosensors shares for a 70% stake) for

interventional cardiology and critical care products in Indonesia. Finally, on 2Japan inChina, theIndonesian company to localize the manufacturing of Biosensors?nd

January the company has announced formation of an

activities are related to development, manufacture, assembly and sale of medical

devices/products.

We believe it may be possible to make some gains near term as the company has

said it expects to announce its CE approval by the end of January. However,

once that?s done, unless the company is acquired, the stock could trade side

ways for the next 6-9 months. We believe ramping up of Biosensor?s

manufacturing and marketing network will take some time and after obtaining a

CE approval the company will still have to individually apply to most countries

in Europe and Asia to get approval from local regulatory authorities though in

most cases this should be merely procedural and take a few weeks to a few

months time. Once this is done, the company may be able to participate in

hospital tenders which may occur at specific times during a year. Thus it may

take some time to convert the CE approval into sales dollars.

Risks

We believe the two key risks with Biosensor?s biomatrix products are: 1) Larger

clinical trials do not support the safety and efficacy data indicated by the initial

clinical trial data that Biosensors has presented; and 2) Competing products (e.g.

bioabsorbable stents) hit the market much sooner than expected making

Biosensor?s Biomatrix stent obsolete. We note that CRT 2008 will have talks on

several Bioabsorbable stent programs including the Orbus Neich, REVA,

Absorbable Magnesium stents, ABSORB trial and BTI Salicylate-based

Polyanhydride Ester absorbable sirolimus-eluting stent.

Valuation

We value Biosensors on a discounted cash flow to equity basis using CoE of

11.5%, terminal growth of 2% and assuming the company is able to capture 8%

of DES market by FY14. Our price target of S$1.25 values the company at

US$810m (excluding US$180m to be paid to JW Medical, assumed to be value

neutral) compared to Conor?s acquisition price of US$1.3b.

We note that since our last valuation of the company, Conor?s CoStar stent has

been withdrawn from the market and the US DES market size has shrunk about

17%. However, with strong positioning in China, anticipated receipt of CE

approval (which could lead us to review our high 11.5% CoE assumption) and

recent positive industry news flow, we retain our price target. We are also

currently assuming that the JW acquisition is value neutral though this may be

overly conservative.

Near-term gains could be madeIndian subsidiary whose

restenosis rates in the past have been reported to be 20% or higher) and thus the

price premium that DES commands over BMS could reduce (DES costs about

US$2,500-3,500 Vs BMS which costs about US$1,000-1,500). Thus could result

in further shrinkage of the DES market size.

We understand Biosensors is also in early stages of developing a biodegradable

stent.

over a period of 36 months from 120 patients treated with Biomatrix stent under

Stealth trials and indicates nil rate of stent thrombosis.nd Oct 2007, the long

Recent industry developments

We believe via this transaction, Biosensors is acquiring JW's distribution

strength in China which is valuable given its strong market share. Also, JW has

a biodegradable polymer stent - and will help Biosensors ramp up production

capacity. Most companies tend to have teething problems during ramping up

production (even the bigger companies in US have had ramp up problems) - so

JW?s skills at manufacturing a stent with biodegradable polymer should be of

help to Biosensors.We believe receipt of the CE approval will enable the