Treasure Chest | Oct 17 2012
By Greg Peel
Last week brokers were generally a bit downbeat on blood fractionator CSL ((CSL)) following upbeat news from rival Baxter. Eli Lilly – a new contender in the ring – has announced positive trials of its new competing product but it's very early days and approval, and thus any threat to CSL's market share, is a long way off. Not so for Baxter however, which is proving a worthy opponent and has just signed a distribution deal of its Advate product with the Brazilian government.
Deutsche Bank saw the deal as threatening a small loss of low-margin sales for CSL, but the analysts conceded that sales of plasma-derived coagulents (12% of CSL revenue) are generally under pressure. RBS went one step further in suggesting Baxter's updated guidance suggests the glory days of CSL global market domination are drawing to a close. The analysts cannot see further double-digit earnings growth ahead.
UBS, however, has been concentrating its analysis on the first step in the fractionation process – plasma collection. To that end, the UBS analysts recently set off on a field trip to the US.
To set the scene, one must appreciate, UBS points out, that a litre of blood collected today will not impact on CSL's revenue line until early FY14 given fractionation takes up to nine months. The field trip has convinced UBS that CSL is planning to grow “above market” in the next fiscal year through a 10% plus increase in plasma collection. The figure may even be higher given ten new collection centres being opened.
The industry itself suggests fractionation demand is robust and growing 8-10% globally, and UBS forecasts that the closure of a Baxter plant for refurbishment in FY13 will create around a 15% potential growth window for competitors in 2013 with meaningful volume returns appearing in 2014.
It is important to note blood fractionators set their collection volume targets for the year and once this is known, the material component of that company's growth outlook is set. On the basis of what the UBS analysts have learned, they have upgraded their FY14 plasma volume growth by 11% and this translates into a 3.2% increase in forecast earnings.
But wait, there's more.
UBS further reports that “break-out sessions” at the recent World Federation of Haemophilia global conference on CSL's recombinant clotting factors were “very encouraging”. UBS has fiddled its numbers to account for expectations CSL's rFIX and rFVIII enter pivotal trials in the next six months. The net effect is an R&D valuation gain of 80% or $5.50ps.
“Given limited visibility on trials to date,” says UBS, “we rate the upgrade as 'overdue'”.
UBS has increased its twelve month price target for CSL to $52.00 from $46.60 and upgraded its recommendation to Buy from Neutral.
The rating upgrade brings to four the number of Buy ratings for CSL in the FNArena database, accompanied by four Holds. Valuation is an issue for some brokers as evidenced by the consensus target of $45.79 (including the UBS increase) sitting 3% below the current traded price, as shown in FNArena's Stock Analysis. This puts CSL in danger of drawing attention from FNArena's Icarus Signal.
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