Universal Biosensors gets tested

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.

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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.

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Brendon Lau holds shares in UBI