CSL gets a shot in the arm

Since our last review on December 4 (Long Term Buy - $12.12) its share price has surged to over $14.00, an increase of around 16% in less than six weeks. Is the stock still worth buying at these prices? In short 'yes', but only on weakness.

Now for the catch

Rarely do governments give something for nothing and this deal is no exception. The arrangement involves CSL becoming a participant in the Commonwealth Department of Industry, Science and Resources Pharmaceutical Industry Investment Program. The idea being that participants receive partial compensation for lower pharmaceutical prices resulting from the government's pricing controls. The catch is that the program replaces the existing Factor (f) compensation scheme, but to a lessor degree. In fact CSL will receive less government funding under the program and the company believes this may put some pressure on earnings growth in 1999-2000 during the scheme changeover.

As taxpayers we should be pleased with the arrangement but CSL shareholders are likely to take an altogether different view. Research and development (R&D) is the lifeblood of companies like CSL, the seed that is sown to develop new products and vaccines that eventually generate returns for stockholders.

Future still bright

Having a healthy R&D program is also a big benefit to the country, employing and training a highly technical and scientific workforce. This is why the government is between a rock and a hard place: If profit margins on products fall because of government controls to keep the costs down (and win votes) then something has to give. In very simple terms, R&D may suffer and our quest to become the clever country with it.

Even so, we believe CSL remains an outstanding long term investment. A virtual monopoly in the Southern Hemisphere on manufacturing biologically based healthcare products, solid financials underpinned by a strong balance sheet and a proven management team provides the foundations for exceptional growth.

While the recent move in the share price shows that sentiment is still very much with CSL, these higher prices also make it harder for new investors to step up to the plate and buy the stock. Look to BUY for the longer term below $14.00 when the market takes a 'healthy' breather.