Universal Biosensors gets tested

The medical device maker’s shares suffered a jolt … but the prognosis remains strong.

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
CodeNameRationaleMarket 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.1,041.0965.7Telecommunication Services
NHF NIB HoldingsOnly listed health insurer. Widely held. Good performer.946.0532.65Financials
ARP ARB Corp Well covered but good candidate for core holding due to quality management.910.3728.4Consumer Discretionary
GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.869.38140.55Consumer Discretionary
MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.839.8719.87Industrials
MMS McMillan Shakespeare One of the best performers since the GFC, but ongoing risk of change to FBT rules is hanging over the company.792.93-15.81Industrials
AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.743.1647.19Consumer 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.699.1126.78Health Care
AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.654.3948.8Financials
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.654.16-14.69Materials
SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.599.6954.66Consumer Discretionary
RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.557.6956.37Consumer Discretionary
BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.542.16101.97Consumer Staples
CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.532.0259.3Consumer Discretionary
ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.530.37-1.16Health Care
CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.498.1174.61Financials
NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.473.5213.68Telecommunication Services
BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.468.43-46.78Energy
AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.465.8843.68Telecommunication 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.462.6140.85Energy
TGR Tassal Group Salmon farmer is finally turning a corner with an improved harvest strategy and growing demand for product.451.24127.96Consumer Staples
RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?442.9389.84Industrials
HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.429.381.37Energy
TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.428.0421.53Industrials
SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.427.33-28.9Information Technology
FGE Forge Group One of the better performers in its industry. Good track record and potential core holding.421.3725.53Industrials
CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.411.9638.37Industrials
MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.402.7644.29Financials
NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.376.50-27.2Industrials
MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.374.70171.43Health 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.355.4879.56Financials
TGA Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.332.0425.36Consumer Discretionary
UXC UXC Company has turned corner and enjoyed re-rating. What's next?327.5716.85Information Technology
GID GI Dynamics IncLargely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal liner on diabetics.319.7819.71Health Care
BNO Bionomics One of the larger cancer treatment developers in this market.313.15131.66Health Care
RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.280.55-0.3Information Technology
IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.275.7373.71Information Technology
AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 275.4844.13Financials
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SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.241.34253.59Consumer Staples
MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.240.1161.1Industrials
SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.239.6690.93Industrials
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AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.230.5422.39Financials
IMF IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.229.1727.4Financials
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 further214.0177.81Industrials
TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.212.51105.09Materials
ACL AlchemiaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.210.8214.04Health Care
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SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?180.7091.82Consumer Discretionary
DTL Data#3 Well respected IT company that receives little press coverage.180.156.24Information Technology
IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.179.92119.15Information 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.179.38-23.57Financials
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HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.168.6028.43Information Technology
CKF Collins Foods One of the few food franchise listed companies.157.6457.81Consumer 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.140.9950.18Telecommunication Services
MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.136.726.82Information Technology
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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.121.44-14.35Consumer Discretionary
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UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.113.49-18.75Health Care
REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.113.39-11.97Industrials
AMA AMA Group Good turnaround story but under the automotive services group is radar of most.111.3055.69Consumer Discretionary
WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.108.5632.9Industrials
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.95.8258.08Consumer 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.94.621205.56Information Technology
DRM Doray Minerals Widely held by instos. One of the more favoured gold explorers by brokers.92.92-25.57Materials
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.91.84-30.77Health Care
CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 87.38-7.14Materials
CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.85.89-4.16Health Care
BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.84.71-38.98Industrials
RUL RungePincockMinarco IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.81.9838.1Industrials
AOH Altona Mining Noteworthy copper play with Xstrata pull-out of Roseby project in Australia and the good ramp up of its Finnish project.74.51-51.72Materials
PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.74.01-7.41Energy
TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.68.7214Consumer Staples
CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.68.4960.04Materials
LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.66.95-9.56Information Technology
YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.65.98-12.28Materials
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.59.9948.78Consumer Discretionary
CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year59.24-0.64Health 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.58.59754.55Financials
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.56.42-85.55Materials
TSM ThinkSmart Potential turnaround story worth keeping eye on.56.0086.49Financials
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.47.16-6.03Industrials
UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.46.33-52.86Materials
EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.40.61126.96Consumer Discretionary
NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.29.6070.37Information Technology
PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.15.8187.57Health Care
Source: Eureka Report, Bloomberg

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