Confidence in Universal Biosensors (UBI) is being tested. Shares in the company suffered their worst fall in nearly a year yesterday (Tuesday) when they tanked 10% following news that the company’s new product launch will be delayed until the first half of next year.
That isn’t the only dark cloud on the home medical testing device maker’s horizon, although attention is squarely focused on the fact that first commercial sales of its coagulation tester will not occur this year as originally thought.
The delay is blamed on the lack of suitable patients with severe blood clotting problems to test the new device on. The device, which is being developed in partnership with Siemens, needs to be tested on patients with varying severities of the condition to secure regulatory approval in the US.
Biotech investors have little appetite for uncertainty and sold the stock down 7 cents to 64 cents on Tuesday. Shareholders in companies like Universal Biosensors sell first and ask questions later, because a small change in assumptions can have a disproportionately large impact on earnings as they are usually coming off a very low base. This is the bane and benefit of emerging companies.
The uncertainty is worse for Universal Biosensors, because it is extremely hard to quantify the launch delay, although its chief financial officer Salesh Balak is downplaying the longer-term impact to the company.
“Investors are understandably disappointed, but there is nothing wrong with the product,” Balak told Eureka Report.
The clinical site that Universal Biosensors and Siemens are using to test the product for Food & Drug Administration (FDA) approval has managed to get enrolment for patients with an INR (International Normalised Ratio) of zero to four, but is struggling to find patients with a reading from four to eight.
The INR scale goes from zero to eight and the higher the reading, the worse the condition. It isn’t easy to find candidates from the second category, as around 80% of patients on oral anticoagulation drug warfarin have an INR of zero to four.
Balak estimates that Universal Biosensors and Siemens may be out of pocket by up to $60,000 (both companies will split the cost) to engage a new test facility to help recruit the necessary numbers of higher-risk patients, although he would not reveal the how many are needed.
The setback means the device will be three to six months behind, and this gives rival Roche more flexibility in putting up defences. Roche’s coagulation tester is the leader in the US, with around 60% to 70% market share.
If that isn’t enough to worry about, Canaccord Genuity analyst Matthijs Smith points out that the industry is in a state of flux.
“The market for anticoagulation drugs is changing dramatically,” says Smith. “This test is for people on warfarin but there’s a whole bunch of new orally available anticoagulation drugs that are a lot safer than warfarin – so what will the market look like in three or four years’ time, I have no idea.”
Depending on the length of the delay and initial take-up rates for the Siemen’s marketed device, the bottom line impact to Universal Biosensors could be around $1-3 million. Not a big amount in absolute terms, but it’s a good chunk of Universal Biosensors’ estimated net profit of $6.4 million for the current year.
But the financial impact is arguably small relative to the damage to confidence. Investors will have every right to wonder what other surprises could be lurking around the corner – and that could come about from legislative changes to medical insurance in the US.
The new Affordable Healthcare Act, more popularly called “Obamacare”, will see rebates on blood glucose testing devices cut by 72%, and that can have material impact on sales of such products.
Universal Biosensors’ other product that is sold by LifeScan (a Johnson & Johnson subsidiary) is aimed at this market, and like the coagulation device, the impact of this is difficult to quantify given that sales of the two devices are out of Universal Biosensors’ hands as this is undertaken by LifeScan and Siemens.
But the cut is likely to drive more users to cheaper devices, and Smith points out that they are spoilt for choice as there is a range of generic glucose testers priced at a 25% to 50% discount to LifeScan’s product.
The good news is that the setback for the coagulation tester will probably only impact the nearer-term attractiveness of Universal Biosensors as an investment. The outlook and growth potential for both devices is huge, despite the challenges listed above, as they have advantages over competing devices on the market.
Even if earnings are trimmed by a quarter due to the product delay (unlikely it will be that drastic), the stock is still looking good value on a one- to two-year basis.
Make no mistake, the risk has gone up a notch, but the reward still justifies me keeping an “outperform” recommendation on the stock.
Brendon Lau holds shares in UBI
Uncapped 100 - Australia's most interesting small cap stocks
|Small cap stocks covered by the Uncapped team|
|Code||Name||Rationale||Market cap ($m)||Total return 1-year (%)||Sector (GICS)|
|MTU||M2 Telecommunications Group||Amazing growth story and well run company. High free float and strong insto support.||1,041.09||65.7||Telecommunication Services|
|NHF||NIB Holdings||Only listed health insurer. Widely held. Good performer.||946.05||32.65||Financials|
|ARP||ARB Corp||Well covered but good candidate for core holding due to quality management.||910.37||28.4||Consumer Discretionary|
|GEM||G8 Education||Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.||869.38||140.55||Consumer Discretionary|
|MRM||Mermaid Marine Australia||Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.||839.87||19.87||Industrials|
|MMS||McMillan Shakespeare||One of the best performers since the GFC, but ongoing risk of change to FBT rules is hanging over the company.||792.93||-15.81||Industrials|
|AAD||Ardent Leisure Group||Widely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.||743.16||47.19||Consumer Discretionary|
|SRX||Sirtex Medical||A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.||699.11||26.78||Health Care|
|AUB||Austbrokers Holdings||The insurance broker is a strong performer. Widely held and well liked by small cap investors.||654.39||48.8||Financials|
|BDR||Beadell Resources||Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.||654.16||-14.69||Materials|
|SGN||STW Communications Group||One of few companies able to benefit from online shift. Widely held and good insto support.||599.69||54.66||Consumer Discretionary|
|RFG||Retail Food Group||Owns a number of well know franchise brands. Widely followed by instos.||557.69||56.37||Consumer Discretionary|
|BGA||Bega Cheese||Corporate interest in Australian food companies makes the cheese maker worth following.||542.16||101.97||Consumer Staples|
|CCV||Cash Converters International||Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.||532.02||59.3||Consumer Discretionary|
|ACR||Acrux||One of the most successful Australian biotechs in recent history. Widely held by instos.||530.37||-1.16||Health Care|
|CWP||Cedar Woods Properties||Property developer with good ROE and earnings growth track record.||498.11||74.61||Financials|
|NXT||NEXTDC||The cloud computing company is an IT sector darling. Fairly widely held and followed.||473.52||13.68||Telecommunication Services|
|BRU||Buru Energy||Substantial size but not often covered by press. Widely held with good insto support.||468.43||-46.78||Energy|
|AMM||Amcom Telecommunications||Well covered junior telco but good candidate for core holding.||465.88||43.68||Telecommunication Services|
|SEA||Sundance Energy Australia||Analysts have a favourable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.||462.61||40.85||Energy|
|TGR||Tassal Group||Salmon farmer is finally turning a corner with an improved harvest strategy and growing demand for product.||451.24||127.96||Consumer Staples|
|RCR||RCR Tomlinson||Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?||442.93||89.84||Industrials|
|HZN||Horizon Oil||One of better regarded small energy stocks that doesn't receive much media attention.||429.38||1.37||Energy|
|TOX||Tox Free Solutions||Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.||428.04||21.53||Industrials|
|SLX||Silex Systems||Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.||427.33||-28.9||Information Technology|
|FGE||Forge Group||One of the better performers in its industry. Good track record and potential core holding.||421.37||25.53||Industrials|
|CCP||Credit Corp Group||Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.||411.96||38.37||Industrials|
|MYS||MyState||Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.||402.76||44.29||Financials|
|NWH||NRW Holdings||One of the better regarded mining & civil contractors with good track record in delivering on projects.||376.50||-27.2||Industrials|
|MYX||Mayne Pharma Group||Sizeable generic drug maker with interesting board members.||374.70||171.43||Health Care|
|MOC||Mortgage Choice||Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.||355.48||79.56||Financials|
|TGA||Thorn Group||One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.||332.04||25.36||Consumer Discretionary|
|UXC||UXC||Company has turned corner and enjoyed re-rating. What's next?||327.57||16.85||Information Technology|
|GID||GI Dynamics Inc||Largely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal liner on diabetics.||319.78||19.71||Health Care|
|BNO||Bionomics||One of the larger cancer treatment developers in this market.||313.15||131.66||Health Care|
|RKN||Reckon||Fierce competition for cloud base accounting software puts it in firing line.||280.55||-0.3||Information Technology|
|IPP||iProperty Group||Worth watching as it is trying to be the REA Group of Asia.||275.73||73.71||Information Technology|
|AEU||Australian Education Trust||Well performing childcare centre property owner. Good yield story and outlook.||275.48||44.13||Financials|
|SPL||Starpharma Holdings||Noteworthy for its good pipeline of innovations. Well run, widely followed.||269.96||-35.59||Health Care|
|RIC||Ridley Corp||High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.||258.57||-18.69||Consumer Staples|
|SHV||Select Harvests||Noteworthy for turbulent past and exposure to soft commodity market.||241.34||253.59||Consumer Staples|
|MXI||MaxiTRANS Industries||Transport equipment maker posted good interim result. Has appealing yield and growth.||240.11||61.1||Industrials|
|SIV||Silver Chef||Strong jump in the share price of the equipment financing group has attracted a good following.||239.66||90.93||Industrials|
|GXL||Greencross||Acquisitive veterinary group. Good profit growth and share price performance, but gets little press.||238.72||125.37||Health Care|
|NWT||Newsat||Potential large cap if it can launch its own satellite in 2015.||233.00||-15.84||Telecommunication Services|
|AJA||Astro Japan Property Group||Strong leverage to Japanese economy makes this an interesting stock to watch.||230.54||22.39||Financials|
|IMF||IMF Australia||Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.||229.17||27.4||Financials|
|CLH||Collection House||In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further||214.01||77.81||Industrials|
|TFC||TFS Corp||The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.||212.51||105.09||Materials|
|ACL||Alchemia||One of the few biotechs with revenue stream. Good pipeline of oncology treatments.||210.82||14.04||Health Care|
|DWS||DWS||Will be a big beneficiary if governments start spending on IT again.||206.49||2.14||Information Technology|
|TGS||Tiger Resources||Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.||205.80||-14.08||Materials|
|VOC||Vocus Communications||Telecom stocks are in favour but Vocus is one of the least covered||201.03||40.32||Telecommunication Services|
|NAN||Nanosonics||A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.||198.43||55.67||Health Care|
|PFL||Patties Foods||Illiquid stock but has suite of well recognised consumer brands. Defensive yield.||180.79||-19.66||Consumer Staples|
|SFH||Specialty Fashion Group||In early stages of turnaround. Can the women's apparel retailer sustain the momentum?||180.70||91.82||Consumer Discretionary|
|DTL||Data#3||Well respected IT company that receives little press coverage.||180.15||6.24||Information Technology|
|IFM||Infomedia||Interesting tech play in the car parts market. Strong share price gain but gets little air play.||179.92||119.15||Information Technology|
|WBB||Wide Bay Australia||The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.||179.38||-23.57||Financials|
|IMD||Imdex||Drilling company is well supported by instos and should benefit from any rebound in exploration activity.||178.90||-45.36||Materials|
|RCG||RCG Corp||The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.||175.00||72.92||Consumer Discretionary|
|HSN||Hansen Technologies||Operates in a high potential/growth industry but is not covered by press or brokers.||168.60||28.43||Information Technology|
|CKF||Collins Foods||One of the few food franchise listed companies.||157.64||57.81||Consumer Discretionary|
|BGL||BigAir Group||The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.||140.99||50.18||Telecommunication Services|
|MLB||Melbourne IT||A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.||136.72||6.82||Information Technology|
|NEA||Nearmap||A stellar performer with an Interesting business that offers high quality aerial maps to companies & government.||129.34||1233.33||Information Technology|
|SAR||Saracen Mineral Holdings||Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.||127.98||-59.43||Materials|
|AZZ||Antares Energy||Liquid with good insto support. Already in production with exploration upside in Texas.||127.50||-5.66||Energy|
|ESV||Eservglobal||Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage||125.77||188.57||Information Technology|
|LCM||LogiCamms||Strong price performance and reasonable valuation attracting interest.||123.14||72.95||Industrials|
|MCP||McPherson's||The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.||121.44||-14.35||Consumer Discretionary|
|GHC||Generation Healthcare REIT||One of the more interesting REITs. Income is more defensive than typical property stock and its greenfield expansion gives it earnings growth potential.||114.36||34.47||Financials|
|UBI||Universal Biosensors Inc||Well regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.||113.49||-18.75||Health Care|
|REX||Regional Express Holdings||Well run airline that is overshadowed by Virgin and Qantas.||113.39||-11.97||Industrials|
|AMA||AMA Group||Good turnaround story but under the automotive services group is radar of most.||111.30||55.69||Consumer Discretionary|
|WDS||WDS||Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.||108.56||32.9||Industrials|
|JIN||Jumbo Interactive||Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.||95.82||58.08||Consumer Discretionary|
|MNW||Mint Wireless||Huge market potential if the mobile card payment solutions provider can gain market traction. Management aiming for $1 billion in transaction value a year.||94.62||1205.56||Information Technology|
|DRM||Doray Minerals||Widely held by instos. One of the more favoured gold explorers by brokers.||92.92||-25.57||Materials|
|POH||Phosphagenics||Sizable biotech with a game changing FY14 year ahead. Good insto following but questions of poor audit and governance standard could dog company.||91.84||-30.77||Health Care|
|CAA||Capral||An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose.||87.38||-7.14||Materials|
|CLV||Clover Corp||One of the star performers in 2012. Operates in growing but relatively stable niche.||85.89||-4.16||Health Care|
|BOL||Boom Logistics||Crane hire group is riding out the downturn in construction. It's widely held by instos and is very liquid.||84.71||-38.98||Industrials|
|RUL||RungePincockMinarco||IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.||81.98||38.1||Industrials|
|AOH||Altona Mining||Noteworthy copper play with Xstrata pull-out of Roseby project in Australia and the good ramp up of its Finnish project.||74.51||-51.72||Materials|
|PEN||Peninsula Energy||Widely held by instos and large free float. It's the only uranium miner on the list.||74.01||-7.41||Energy|
|TAN||Tandou||The only direct equity exposure to cotton prices. Also trades water rights and receives little press.||68.72||14||Consumer Staples|
|CKL||Colorpak||The small cap packaging company has grown via acquisitions over past few years.||68.49||60.04||Materials|
|LGD||Legend Corp||Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.||66.95||-9.56||Information Technology|
|YTC||YTC Resources||Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.||65.98||-12.28||Materials|
|OTH||Onthehouse Holdings||Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a competitive edge against REA.||59.99||48.78||Consumer Discretionary|
|CUV||Clinuvel Pharmaceuticals||Interesting skin disorder treatment developer that has done reasonably well over past year||59.24||-0.64||Health Care|
|EML||Emerchants||Trying to change way corporates and governments disburse cash with its trackable and controllable debit card offering. If company can get $1 billion in loaded value on cards, the stock will surge.||58.59||754.55||Financials|
|GXY||Galaxy Resources||Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.||56.42||-85.55||Materials|
|TSM||ThinkSmart||Potential turnaround story worth keeping eye on.||56.00||86.49||Financials|
|KOV||Korvest||The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.||47.16||-6.03||Industrials|
|UML||Unity Mining||Growing Tassie gold producer with high free float. Valuation looks compelling too.||46.33||-52.86||Materials|
|EBT||eBet||Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.||40.61||126.96||Consumer Discretionary|
|NTC||NetComm Wireless||Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.||29.60||70.37||Information Technology|
|PGC||Paragon Care||Emerging hospital equipment supplier that has been ignored by market.||15.81||87.57||Health Care|
|Source: Eureka Report, Bloomberg|