CSL Facing Blood Pressure Test

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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

It was back in April when US blood products producer and CSL ((CSL)) competitor Baxter announced weaker than expected first quarter earnings and, more ominously, a big drop in second quarter guidance. The market responded by hammering down CSL shares from around $37 to near $32, before the overall correction saw CSL bottom at under $31.

Last night CSL's European competitor Biotest was next to make a major downgrade, dropping its 2010 earnings guidance by 27%. The German-based fractionator which is the second largest to CSL in Europe and seventh largest globally, suggested pressure on plasma prices was a lot greater than had been anticipated. Impending German healthcare policy reforms will also reduce earnings ahead.

Biotest's downgrade only serves to reinforce the same market problem experienced by Baxter, being that a drop off in demand for expensive plasma products in light of lower consumer spending capacity has sent the market into oversupply. The streets are running with blood.

When the Baxter announcement was made, the response from local CSL analysts was not to panic. Experience has shown that when the smaller companies struggle, CSL picks up market share. Thus while pressure on plasma pricing was foreseen, it was possible the impact on CSL's bottom line would be tempered. However, the risk was always that a loss of market share would spark a discounting drive from the losers.

The UBS June quarter plasma price and supply survey notes that Baxter has been countering loss of market share by offering volume rebates. While CSL has also picked up market share from Biotest in the past, again there is now a discounting risk which can only impact on all market players. It is this discounting which has analysts expecting that CSL an only look forward to flat earnings growth in FY11.

UBS notes the plasma cycle across the globe tends to follow a typical pattern. When plasma is in global undersupply, the rest of the world pays over US prices and when in oversupply, pays under. This is currently the case. With plasma collection rates falling, expectation is for the demand/supply equation to move towards equilibrium again in 2011. However the production process is a long one, meaning a lag effect, which in turn suggests discounting will continue for a while yet. This would likely serve to upset the typical cycle, UBS believes, which again reinforces the expectation of a flat FY11 for CSL. Deutsche Bank notes Biotest does not predict any relief on the pricing front until late 2011.

BA Merrill Lynch agrees with the flat earnings growth call, but notes that CSL's newer products Privigen and Hizentra should at least provide industry outperformance for CSL. CSL also has several “large product” advantages, notes Merrills, such as subcutaneous Ig. However plasma discounting will continue to threaten downside, and Baxter is expected to launch its own “sub-q” towards the end of F11, later followed by a “hi-q” product. At that point CSL's above-market growth rate advantage in such products will be crimped.

FNArena's Stock Analysis tool shows consensus among major brokers is currently for 5.6% earnings growth in FY11, and target prices average to $38.05 (16% upside form this morning's trading price which is down 3% on the Biotest news). Merrills believes CSL management will guide to “zero to 10%” profit growth for FY11 but that ongoing discounting will mean a result more likely at the lower end of the range. Hence 5.6% is possibly as good as can be expected for now. However those targets may come down once all brokers absorb the Biotest announcement.

CSL currently enjoys a 5/5/0 Buy/Hold/Sell ratio in the database.

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