Earnings Result Leaves CSL Bloodied

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

Uncertain Behring growth, lower vaccine sales and a controversial restructuring plan led to a post-result share price drubbing. Is it all over for CSL?

-CSL's largely in line FY25 causes the share price to fall -19%
-Behring growth slowing, margin target abandoned
-Planned Seqirus demerger confounds, cost-cutting confusing
-Business is not 'broken' argue the Buy-raters, but challenges remain

By Greg Peel

Australia’s largest biotech CSL ((CSL)) reported FY25 earnings on Tuesday and promptly lost -17% in value. Why? Ord Minnett sums it up best.

The FY25 results release from CSL proved a bitter pill for investors to swallow, Ord Minnett declares, as the many ingredients – revenue weakness in its key immunoglobulin (IG) market, ramped-up competition in the specialty products segment, US-led softness in its Seqirus vaccine division, a “confounding” plan to separate that business, and a sweeping restructure of R&D and broader business operating model to deliver targeted cost savings that Ord Minnett views as optimistic – spurred the market to erase almost a fifth of the company’s market capitalisation.

These factors, combined with the company walking away from its previous timeline of 3-5 years for a recovery in margins in the dominant Behring plasma products business have introduced a previously lacking degree of uncertainty and complexity into the earnings outlook and investment case for CSL.

Behring is the main engine room for CSL, representing over 70% of earnings, with a focus on rare and serious conditions like bleeding disorders, immunodeficiencies and neurological disorders.

Seqirus is largely a seasonal influenza vaccine business, but also produces vaccines for the likes of H5 avian flu. Seqirus accounts for around 10% of group earnings.

Thereafter comes Vifor, which is focused on iron deficiency and nephrology, along with CSL’s specialty products business, which, for example, recently received FDA approval for its Andembry injection (to prevent acute attacks in hereditary angioedema).

Despite what the share price shellacking might suggest, CSL’s FY25 results were broadly in line, featuring double-digit underlying earnings growth, solid operating leverage and strong operating cash flow.

Weaker growth in Behring (6%) was offset by solid growth for Vifor (14%), while Seqirus’ performance was soft (-9%), despite being boosted by one-off avian flu contracts that will not recur in FY26.

As seen in the share price response, the market was not happy with the engine room (Behring) result.

Behring the Brunt

After strong first half IG growth of 15%, the second half nosedived, Jarden notes, delivering negative IG growth of -0.7%, bringing FY25 growth to 7% in constant currency. Stripping out the -US$100m Medicare Part D impact that had been flagged, second half growth would have been 2.8%.

What the US calls Medicare should not be confused with the Australian version. While Australia’s Medicare is a form of universal health insurance, US Medicare is specific insurance assistance for the elderly, while sister Medicaid is insurance for the poor.

The impact from changes to US Medicare part D cannot, believe it or not, be blamed on Trump. It was included in Biden’s Inflation Reduction Act, and lowers the threshold out-of-pocket payment level that patients must cover before a cap is triggered. In other words, lower revenues for pharma companies such as CSL.

Tender losses, however, caught Jarden off guard, impacting IG revenues from April 2025 as CSL gave up on low margin UK and Mexico tenders. Losing these tenders results in a -300-400bps impact to growth in FY26 as the revenue rebases for another nine months.

Yet, while Jarden (and everyone else) does not like to see CSL’s core franchise slowing, the broker can sympathise with CSL not chasing lower priced contracts out of the UK, especially at a time when the US is contemplating Most Favoured Nation pricing.

MVN pricing is Trump’s attempt to blow up any nation’s equivalent of Australia’s Pharmaceutical Benefits Scheme that lowers drug prices when US equivalent prices are relatively huge, by imposing enormous tariffs yet to be confirmed.

The good news is UBS does not view Behring’s weak result as reflecting structurally higher competition from industry oversupply, noting CSL’s expectations for medium-term IG sales growth are in line with competitors Grifols, Takeda and Haemonetics.

The bad news, however, and arguably a major driver of the negative share price reaction, is CSL’s abandonment of its long-standing guidance to a recovery in Behring gross margins to pre-covid levels of circa 57% by FY27-28.

In constant currency, the Behring’s second half gross margin of 50.3% was up 80bps year on year, Morgan Stanley notes, but down -140bps half on half. The combined impacts of additional staff costs, delays in new product launches and uptake and FX headwinds have resulted in the delay of previous gross margin targets, with management now providing no specified timeline, other than it is targeting year on year improvement.

If CSL is no longer confident, how can investors be confident? Brokers have pushed their own expectations of a return to pre-covid margins out to FY30, or FY29 at best.

Seqirus Fire Sale?

The most controversial announcement stemming from CSL’s result release was a planned demerger of the Seqirus business into a separate ASX-listed entity.

Ten years after the acquisition of Novartis’ flu vaccine business, CSL plans to demerge what became Seqirus by FY26-end. This came as a surprise, and for Citi the value creation for CSL shareholders isn’t straightforward – it will largely depend on the multiples the market applies to the two entities.

CSL sees a spin-off of the vaccine division as simplifying the overall company structure, arguing the vaccines business has a different focus to the Behring and Vifor operations. In Ord Minnett’s view, however, the separation plan does not stack up at this stage given CSL’s changes to its segment reporting mean there is limited visibility on just what Seqirus’ operating earnings are.

In addition, valuing Seqirus in the absence of any comparable pure-play influenza stocks on global markets further muddies the strategic rationale for such a move.

Bell Potter finds the decision to demerge Seqirus operationally understandable, but unlikely drive near-term valuation uplift due to falling vaccination rates and a soft growth outlook.

The demerger is equally “somewhat puzzling” to Jarden given flu sales appear to be at a cyclical low point.

For that we can blame Trump’s anti-vax stance, driven by his bizarre Health Secretary RFK Jr. There was a lot of push-back across the US to mandatory covid vaccination, an attitude that has flowed into flu vaccination demand. Measles, once eradicated, is now at epidemic proportions in parts of the US, thanks to children not being vaccinated.

CSL points to low cost synergies between Seqirus and Behring, with a demerger enabling faster cost-out, capital allocation autonomy and better capitalisation of opportunity.

Morgans suggests a Seqirus demerger simplifies CSL’s portfolio, sharpens operational focus, and supports margin and return on invested capital improvement.

Cost Restructuring

A Seqirus demerger is part of a wider restructuring for CSL, which also involves streamlining R&D and commercial productivity, targeting US$500-550m pre-tax savings by year-end FY28.

The US$500m-plus in savings should help to underpin the delivery of double-digit earnings growth over the medium term, Morgans suggests.

A sticking point is the company then expects to reinvest half of the savings into the core businesses, eg via M&A or R&D. Given growing competition in some of its markets, Ord Minnett counters spending on sales and marketing to support revenue growth would be a better use of funds.

It remains unclear what the net savings will be from the US$500-plus annualised cost saving initiative, Bell Potter notes, as these savings are prior to flagged reinvestments, resulting in difficulty confidently forecasting earnings post FY26.

Jarden agrees, because the cost-out program came with the caveat of being partly available to source further growth initiatives, the quantum and format are not yet clear.

An announced A$750m buyback is welcomed, especially after the share price fall.

Value?

Back in mid-July, Morgans was at pains to suggest trading levels for CSL shares were significantly below fair value, pricing Australia’s largest biotech as less than a single-division company, with the main Behring division alone justifying a higher valuation and with no value assigned to either Seqirus or Vifor.

Indeed, all of the seven brokers monitored daily by FNArena covering CSL had Buy or equivalent ratings.

Although a softer second half Behring result and “awkward” restructuring timing may unsettle investors, Morgans sees the growth engine intact, with cost savings reinforcing the path to sustained double-digit earnings growth. Morgans retains its Buy rating.

CSL’s de-rating post the result reflects operating growth concerns following a disappointing Behring performance and greater focus on cost savings. This created an overreaction, UBS believes, to a modest compositional change in CSL’s three-year earnings growth.

In particular, even after allowing for a smaller R&D premium, UBS believes CSL is undervalued in a status-quo operating environment. However, this broker also acknowledges it is hard to see a re-rating catalyst with confidence around Behring unlikely to return in the first half FY26 and ongoing earnings tail risk from MFN and US tariffs. Yet, UBS retains Buy, given it believes the de-rating is overdone.

Similarly, Macquarie sticks with Outperform, viewing Tuesday’s price movement as an overreaction. Incorporating more conservative FY26 forecasts compared to guidance, Macquarie sees the current valuation as undemanding, trading at PE of 20x with 10% earnings per share growth.

At a ten-year low PE, and a business that’s not “broken”, Citi equally sees value in the shares, and maintains Buy.

CSL’s result highlighted weaker IG trends, with delays in gross margin recovery for Behring. Yet Mogan Stanley retains a positive medium to longer-term view, and an Overweight rating.

Breaking from the pack is Ord Minnett. This broker has downgraded to Hold from Buy given the earnings outlook and what the broker sees as the challenges facing the company.

Bell Potter is of a similar mind.

While the market reaction to the FY25 result and strategic review was severe, Bell Potter views the near-term outlook as challenging for CSL due to underlying earnings growth below market expectations, an underwhelming second half Behring performance, which has been the key pillar of growth for many years, delays to the assumed Behring margin recovery, and uncertainty around FY27-28 forecasts of the demerged entity at this time.

There were seven from seven Buy or equivalent ratings among those brokers last month and there’s now a remaining five, with two Holds. The consensus target amongst them is now down to $282.68 from $316.21.

Jarden also sticks with Overweight, although that is one rung down from Buy on Jarden’s five-tier system, with a target reduced to $298.13 from $313.12.

A less positive Wilsons had to make fewer adjustments as it was already positioned below the market. Wilsons believes this week’s market update has put to rest a number of investment theses and assumptions that had to date supported the CSL share price. Even after this week’s de-rating, CSL shares are still trading at a 30% premium to global Pharma peers, this broker notes.

Wilsons rates the shares as Market Weight with a price target of $227.50.

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