CSL: Result 2015
Recommendation
Blood products maker CSL has reported a decent full year result, with revenue increasing 2% to US$5.5bn compared to a year earlier, or 7% after removing the effect of currency fluctuations. At constant currency and excluding one-off acquisition costs for its new influenza unit (see below), net profit increased 10% to US$1.4bn while earnings per share increased 13% to $2.91 due to the ongoing share buyback program.
CSL's largest division, CSL Behring, increased sales by 7% after removing the effect of currency fluctuations. Revenue for CSL's plasma-derived antibody products – which help to prevent infections when a patient's immune system isn't functioning properly – grew just 5%. This was particularly disappointing because it required an 8% increase in volumes, which implies a fall in the average selling price for the second year in a row.
The culprit is most likely increased pricing pressure from CSL's largest competitors, Baxalta and Griffols, as they increase production capacity. Baxalta (a recently spun off subsidiary of Baxter International) experienced supply constraints in 2014 due to the temporary closure of its Los Angeles fractionating facility, but it's now back online. Griffols also increased its manufacturing capacity from 8.5m litres to 12.5m litres in 2015. We expect it to be difficult for CSL to raise prices any time soon.
Key Points
Albumin growth strong
Haemophilia and antibodies disappoint
Purchase of new flu business complete
Albumin sales increased 12%, with most of the growth due to CSL's expanding distribution network in China as it moves beyond large city hospitals to smaller regional ones. To cope with growing demand, the company has obtained regulatory approval to expand capacity at its base fractionation and albumin production facility in Illinois, USA, which we toured earlier this year (see CSL: Australia's best resource stock).
Revenue from haemophilia treatments increased just 3% in constant currency terms, with flat sales for flagship product Helixate – which is a man-made protein to prevent excessive bleeding – due to the introduction of similar products by competitors Biogen and Sobi. However, management noted 'positive results' from the introduction of a new US patient retention program.
Sales of specialty products – which often have 'orphan drug status' – increased 15%, due to strong demand for Kcentra and Berinert. Kcentra reverses the effects of an anticoagulant for patients who experience major bleeding during surgery and Berinert treats a rare disorder that causes swelling of the face and extremities.
CSL's research and development (R&D) spending was almost unchanged at US$463m, though this is still more than the company earned in revenue just 15 years ago (for details on CSL's current research pipeline, see CSL tackles leading cause of death).
Flu powerhouse
The company has completed its purchase of Novartis' influenza vaccine business, making it the second largest player in the US$4bn global influenza vaccine industry.
Year to June | 2015 | 2014 | /– (%) |
---|---|---|---|
Revenue (US$m) | 5,459 | 5,335 | 2 |
EBIT (US$m) | 1,758 | 1,637 | 7 |
NPAT* (US$m) | 1,379 | 1,307 | 6 |
EPS (US cents) | 291 | 269 | 8 |
Final dividend | 66 US cents, unfranked, (up 10%), ex date 7 Sep |
CSL has outlined some optimistic goals for the business, which will be combined with bioCSL and renamed Seqirus: management expects to double sales to US$1bn over the next five years as well as cut US$75m a year in duplicated administration and research costs. It also expects a 20% earnings before interest and tax (EBIT) margin in five years, which would be quite a feat given the US$150m operating loss the Novartis flu business made in 2014.
It won't be easy but given CSL's track record of successful acquisitions and the large economies of scale associated with vaccine manufacturing, we think management has a reasonable chance at turning the business around.
Management expects revenue to rise 7% in 2016 assuming stable exchange rates and net profit to increase 5%. Earnings per share are likely to grow slightly faster due to the company's aggressive share buyback: the company bought back $950m worth of its shares this year, meaning shares outstanding have now declined by 22% since 2009. The board is currently considering a new round of buybacks for 2016.
CSL's share price is flat since CSL: Australia's best resource stock - Part 2 from 25 Mar 15 (Hold – $93.54) but the stock is up 175% since our initial Buy recommendation on 18 Mar 11 (Long Term Buy – $33.97). With a dominant market position, clean balance sheet and reasonable forward price-earnings ratio of 22, we continue to recommend you HOLD.