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)
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ARP ARB Corp Well covered but good candidate for core holding due to quality management.910.3728.4Consumer Discretionary
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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
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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
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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
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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
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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
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MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.374.70171.43Health Care
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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
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BNO Bionomics One of the larger cancer treatment developers in this market.313.15131.66Health Care
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WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.108.5632.9Industrials
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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