Stock downgraded: Biosensor target price reduces to 1.29 by UOB Kay Hian!

Recommendation: BUY (maintained) Price:
S$0.815 Target:
S$1.29 (previous S$1.61)

KEY POINTS
With management's guidance on higher R&D expenses and an assumed delay in the BioMatrix CE mark, we have made significant downward revisions to our forecasts. Despite this, we maintain our BUY recommendation, albeit with a lowered target price of S$1.29 as our valuation is pegged primarily to FY08 forecasts on DES sales.
Management's FY07 expense guidance. In today's meeting with management, Biosensors' CFO guided that R&D expenses for FY07 would be between US$33-36m, including costs of filing for IDE with the US FDA, and US$23-26m related to the LEADERS and STEALTH II trials. Sales and marketing expenses are projected at between US$14-18m for FY07, of which about 60% would be related to exhibitions, conferences and DES patient registries for clinical data collection. The remainder 40% of sales and marketing expenses would relate to headcount, commissions and sales calls. The other major expense item is general and administrative expenses, which management guided to be around US$13-14m, which would include setting up of its ERP system to connect all its offices globally.
Forecast revisions. The following table shows our revised net profit forecasts. While we had previously expected FY07 to be profitable, our financial model now shows that the assumed delay in the BioMatrix CE mark and higher R&D expenses from clinical trials will push FY07 into the red. Thus, we expect Biosensors to only turn profitable in FY08, with a much lower net profit of US$50.3m vs US$79.0m previously.