Australia | Sep 28 2010
By Chris Shaw
Late last week the European Mediciness Agency recommended the suspension of Octapharma's market authorisation for its IVIG compound octagam through Europe, while the company has also initiated a voluntary recall of the same compound in the US market.
This has implications for the global IVIG market, as UBS notes Octapharma had 11% of global IVIG volumes. This is in a market estimated to be around 8% oversupplied at present, though as UBS also points out the market is currently transitioning to an equilibrium position.
What the Octapharma recall means, according to UBS, is a cyclical turning point in the market, as it implies a pulling forward of estimates for the timing of when the IVIG market will return to a tighter position.
According to UBS, there should now be tight IVIG supply within six months, as for Octapharma to re-enter the market with its compound requires a re-validation process. This appears to be at least a six month process, while there will also be some reputational damage to the company. This means the fallout may last for longer than six months in the broker's view.
This implies some potential for CSL as the company has the opportunity to gain some extra market share and analysts have adjusted their estimates to reflect this. JP Morgan expects CSL's share will increase proportional to its current IVIG market share.
This sees JP Morgan lift its earnings per share (EPS) estimates for IVIG by around 3% in FY11, a move matched by Deutsche Bank. Any gains are seen as temporary, as Octapharma is expected to return to the market at some point.
According to Credit Suisse, Octapharma could be back at meaningful volumes in around 12 months by eliminating only the recalled volumes. The other issue for Deutsche and JP Morgan is there is potential for Octapharma to return to the market with discounts as it attempts to retain lost market share.
Both JP Morgan and Deutsche Bank have also pointed out any gains to earnings from Octapharma's current issues could be offset by a stronger Australian dollar. Deutsche suggests if the recent Australian dollar appreciation is sustained, the earnings uplift from the Octapharma news will be completely offset.
JP Morgan is even more negative on the currency outlook for CSL, the broker cutting its overall CSL EPS estimates by 2% in FY11 and by 4% in FY12 to account for the stronger Australian dollar. This means JP Morgan's EPS estimates for CSL now stand at 178.7c in FY11 and 190.5c in FY12.
Deutsche is forecasting EPS of 196c in FY11 and 228c in FY12, while consensus EPS estimates for CSL according to the FNArena database stand at 190.8c in FY11 and 219.9c in FY12.
Given the likelihood any earnings boost for CSL from the Octapharma recall will only be temporary, there have been no changes in ratings for CSL in the market. FNArena's database shows CSL is rated as Buy twice and Hold five times.
UBS is one to rate the stock as a Buy, taking the view the cycle for CSL has bottomed, yet market estimates do not as of yet price in any return to mid-cycle earnings. This suggests some upside risk to market earnings estimates in the broker's view.
Others are less positive, JP Morgan retaining its Neutral rating given the view the positive CSL share price reaction to the Octapharma news was in fact an over-reaction given there should be little actual earnings impact from the news.
Deutsche also has a Hold rating on CSL, as while the group's defensive nature and better than market growth profile deserves a premium in the broker's view, the market is already seen as pricing this premium into the stock at current levels.
Deutsche Bank has lifted its price target to $34.50 from $32.20, while JP Morgan went the other way and lowered its target to $33.14 from $34.61. The average price target according to the FNArena database is $36.43, up from $36.28 previously.
Shares in CSL today are weaker and as at 11.00am the stock was down 25c at $33.46. This compares to a range over the past year of $30.03 to $37.56 and implies upside of around 8% to the average price target in the FNArena database.