CSL: Interim result 2016

It's hard enough to find 100-year-old companies, let alone 100-year-old companies still churning out double-digit sales growth. But CSL, founded in 1916, has never been much of a conformist.

The blood products maker increased revenue 11% to US$3.1bn in the six months to December, up 9% after removing the effect of currency fluctuations. Net profit increased 7% in constant currency terms to US$719m, while earnings per share increased 9% to US$1.55 thanks to CSL's ongoing share buyback. An interim dividend of US$0.58 cents was also declared, equivalent to about 81 cents in Australian dollar terms.

CSL's largest division, CSL Behring, increased sales 10% in constant currency terms to US$2.5bn compared to the prior year. 

Sales of plasma-derived antibody products (known as immunoglobulins) increased 13%, which was driven by a 13% increase in sales of Privigen, an intravenous antibody treatment and the company's top selling product.

Privigen received expanded approval in Europe to include the treatment of chronic inflammatory demyelinating polyneuropathy (try saying that after a drink or two), which boosted sales, particularly in France and the UK.

Most impressive, however, was a 31% increase in sales of another antibody product – Hizentra – that allows patients to use a portable pump to self-administer their dose by injection under the skin. Sales were particularly strong in the US and Europe where patients were switching from intravenous immunoglobulin products to Hizentra's more convenient dosing and administration.

Albumin sales increased 10% to US$376m after strong demand in all regions. Sales in China were particularly strong, reflecting CSL's recent efforts to increase distribution to small regional hospitals. Sales of specialty products were also buoyant, up 14%, thanks to increased marketing of Kcentra.

Haemophilia product sales increased a paltry 2% to US$509m due to a decline in sales of CSL's recombinant Factor VIII protein (Helixate) offsetting growth in various plasma-derived haemophilia products.

As we explained in CSL's haemophilia products ready for launch, we're optimistic about the company's pipeline of haemophilia products, which are highly differentiated from competitors, including the imminent commercialisation of CSL's new long-acting Factor IX protein. Idelvion, as the product will be known, has a dosing interval up to 14 days – twice that of competitors – making it significantly more useful.

Price guide

Management expects net profit to increase 5% in 2016, while earnings per share should grow slightly faster due to the company's ongoing share buy-back. CSL's share price has more than tripled since our initial Buy recommendation on 18 Mar 11 (Long Term Buy – $33.97), and now trades on a forward price-earnings ratio of around 23.

We're re-introducing a price guide with a recommended Buy price of $80, which would put the company on a price-earnings ratio of 18. That may seem unusually high, but CSL has many competitive advantages and economies of scale, being the world's largest blood products maker and second largest flu vaccine maker (see CSL: Australia's best resource stock).  

What's more, the company has above average growth prospects. Growth differs by division, but it's realistic to expect long-term volume growth of around 4–5% for CSL's key products. CSL has significant pricing power over many products – which are medical necessities without substitute – and price increases should ensure revenue growth in the high single digits. Adding in CSL's operating leverage and ongoing share buy-back, it isn't difficult to imagine earnings per share growth of 10%-plus over the next five years.

But that's not the end of the story. CSL has several products in its pipeline that are bordering on approval and could be significant revenue generators.

One product in particular, dubbed CSL-112, is designed to flush 'bad cholesterol' from the body and dissolve life-threatening plaques that clog arteries, thus reducing the chance of heart attack (see CSL tackles leading cause of death). It appears to work much faster than existing cholesterol-lowering drugs, which are slow-acting and offer little benefit in the weeks following a heart attack, right when a patient needs them most.

Cardiovascular disease is the leading cause of death worldwide, so CSL-112 could be a game changer for CSL and patients. Total sales of cholesterol-lowering drugs already top $100bn a year. Better still, CSL will be able to produce the drug very cheaply using the waste portion of the plasma it already collects.

CSL-112 has progressed to Phase 2 clinical trials. It still has some way to go before reaching commercialisation – and it may never do so – but things are moving in the right direction.

Our recommended Sell price of $150 would give the stock a price-earnings ratio of 34. High, no doubt, but given the nature of drug development, the range of potential outcomes is wide and we don't want to be caught selling a business of CSL's calibre too early. 

In these situations, it's especially important to use our recommended maximum portfolio weighting to guide your buying and selling decisions. If CSL has become a large position in your portfolio, given that the stock has more than tripled since our original recommendation five years ago, then consider taking profits as the share price increases to maintain a portfolio weighting below 6%. HOLD.

Note: The original version of this article has been amended to show 2014 EPS of 146 US cents (instead of 143 US cents) following a correction by CSL to its financial report.