CSL Delivers Healthy Product Growth

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-Increased R&D spending justified
-As long as there's sales and margin growth
-Guidance looks achievable

By Eva Brocklehurst

Blood product company CSL ((CSL)) proved resilient in FY13. The numbers had both hits and misses but what pleased most was the ability to gain market share and expand margins. Brokers are happy with the increased research and development spending (R&D) as long as margin expansion and sales growth of current products remain robust.

Revenue was up 10%, net profit up 21% and earnings per share up 26%, driven by strong product growth in most categories – immunoglobulins up 9%, albumin up 28%, specialty products up 17% and haemophilia products up 2%. Helixate sales were the slowest growing of the major product group because of strong price competition in European tenders and patients being taken from existing therapy to participate in new trials for haemophilia drugs. CSL expects FY14 earnings growth around 14%, with profit a little slower at 10%.

The results held few surprises and this makes the stock attractive to Macquarie. Words like steady, consistent, reliable are proffered when describing CSL. The results missed Macquarie's estimates largely on the back of a stronger currency headwind and higher R&D spending but were made up for by the margin outlook, which is very favourable. UBS finds trading conditions continue to be favourable as global demand growth is robust and this implies market growth. Competitor Baxter's supply problems are expected to persist into 2014 and this will, on UBS' assumption, contribute to more market gains by CSL. UBS thinks CSL is collecting about 15% year-on-year volume growth in the CSL Behring division. UBS also rates structural margin gains as sustainable and has decided to upgrade to a Buy rating from Neutral.

CSL previously announced plans to add 11 new countries for its Privigen and Hizentra registrations and is also focused on product development around dose and labelling. There are two projects which may deliver yield gains of 0.2g-0.4g per litre and thus gains of 5-10% are plausible inside three years for UBS, with material upside possible. Albumin demand remains robust. For Citi, the positive aspects lie with immunoglobulin and albumin growth, tempered only by Baxter's supply constraints easing throughout FY14 and FY15. Specialty products could surprise on the upside if Kcentra and Fibrinogen are particularly successful. The negatives are that the haemophilia product is likely to remain somewhat of a drag, given increased competition, while the influenza business is challenged. R&D is set to increase materially to support late stage trials.

The latest result was affected by some one-off factors such as $30m from renegotiated pension plans and resolution of legacy contracts which won't be repeated in FY14. There was also additional sales of albumin to China because of inventory re-stocking with a new distributor. Albumin sales growth in Asia is expected to be more around the 15% mark in future. Plasma collection efficiency initiatives were also a positive in FY13 but this also may not be repeated in FY14.

Citi also is sceptical that the market share gains CSL made at the expense of Baxter in immunoglobulin will continue, at least at the same rate. Baxter indicated at its second quarter result that the US FDA had accepted the regulatory submission for the planned modification of the old LA fractionation facility, with shipments expected to begin in July. Baxter expects to increase production capacity through 2013 such that it will exit 2013 with immunoglobulin volume growth in the US at 6-8% per annum rate. On this basis, Citi thinks the market share gains CSL is currently enjoying in immunoglobulin will slow. Citi still thinks the growth outlook is solid but it will ease. All up, the broker was not swayed from a Sell rating, believing that on a risk reward basis in the sector, ResMed ((RMD)) offers almost twice the earnings growth on a lower price/earnings ratio.

UBS notes CSL has previously commented on the potential for acquisitions, but now appears to be more focused on investing in organic growth and R&D. CSL is not interested in purchasing earnings unless it comes with synergies, apparently. Credit Suisse thinks Behring will be the power behind the throne. It should continue to outpace market immunoglobulin growth because of the lack of competition and based on competitive pricing for Privigen in Europe.

BioCSL is not expected to deliver a near-term turnaround in earnings contribution. While a sale of the division may seem an obvious solution, contractual arrangements with governments regarding supply of flu antigen, such as in a pandemic, could prohibit this occurring in the short to medium term. Nevertheless, the broker thinks the company's guidance is achievable. Further ahead the potential value of the R&D pipeline is a clear winner for Credit Suisse.

Plasma fractionation accounts for around 85% of CSL's earnings and the remainder is from the manufacture and sale of influenza vaccines, distribution of pharma products in Australia as well as royalties on HPV vaccine sales globally.

On the FNArena database there are five Buy ratings, one Hold and two Sell. A consensus target of $66.55 suggests 3.6% upside to the last traded share price.
 

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