Ten years ago, CSL was famous for three things: volatile earnings, thin margins and pitiful returns on capital. You would be forgiven for thinking the CSL of today was an entirely different company.
More diverse revenue streams and a focus on rare diseases where the company has pricing power has made for more stable earnings and growth. That same pricing power, combined with significant economies of scale, has raised CSL’s profit margin from 4% in 2006 to 20% today. CSL now manufactures a higher volume of vaccines and blood therapies using the same fixed-cost machinery, so this operating leverage has been rocket fuel for return on equity, which has risen from 6% to 43%.
And the good times aren't over yet. In the year to June CSL’s main division, CSL Behring, increased sales 10% to US$5.2bn after removing the effect of currency movements. That’s a decent result for any company let alone one that was founded when Australia’s second prime minister, Alfred Deakin, was still in office.
Behring sales up 10%
New quad flu vaccine approved
Albumin sales continue to boom in China
The result was underscored by an 11% increase in sales of plasma-derived antibody products – known as immunoglobulins – that help to prevent infections when a patient’s immune system isn’t functioning properly.
Sales of Privigen, an intravenous antibody treatment and the company’s top-selling product, were nothing to write home about but still grew a respectable 7%.
Privigen received expanded approval in Europe to include the treatment of chronic inflammatory demyelinating polyneuropathy, which led to strong sales growth in France and the UK. It’s common for older therapies to receive expanded approval down the track, which can add to sales. Privigen has been on sale since 2007, so it’s nice to see new uses – and markets – are still being identified.
Another key product, Hizentra – which allows patients to use a portable pump to self-administer their dose by injection under the skin – increased sales 31% thanks to more convenient dosing options in the USA.
Sales of albumin – a concentrate of plasma proteins extracted from blood and used to treat burns, severe blood loss and various surgeries – increased 12% to US$811m. Sales in China were said to be ‘exceptionally strong and expected to continue’ due to rising demand and CSL’s ongoing expansion into small-city hospitals.
Sales of specialty products, which often have ‘orphan drug status’ and come with special marketing and pricing arrangements, grew 11% to US$977m, buoyed by strong US sales of Kcentra, which reverses the effects of an anticoagulant for patients who experience major bleeding. Berinert was also said to be a positive contributor due to growing awareness and diagnosis of the blood disorder it treats.
|Year to June||2016||2015|| /–
|EPS (US cents)||269||291||(8)|
|Final dividend||68 US cents (up 3%),
unfranked, ex date 12 Sep
In July 2015, CSL bought the influenza vaccine operations of Swiss healthcare behemoth Novartis and the integration of this business with CSL's own vaccine business, bioCSL, is now largely complete. Seqirus, as the new vaccine division is known, unfortunately had a rough first year due to a mild flu season in the northern hemisphere. The division made a net loss of US$116m and required an additional US$90m in one-off restructuring costs.
Management expects Seqirus to break even in the 2018 financial year. As we explained in CSL solves chicken and egg problem, the division shows promise despite today's losses, especially now that its cell-culture-based quadrivalent vaccine (one with two B strains, as well as the two A strains) recently received regulatory approval in the USA. CSL now has a seasonal flu vaccine that offers protection against four strains of influenza, rather than three, which means it can charge more for it.
Research & Development
CSL’s research and development (R&D) spending increased 32% to $614m, due to several therapies in CSL’s research pipeline reaching more costly, late-stage clinical trials.
Overall, revenue rose 8% to $6.4bn after removing the effect of currency movements, while net profit fell 18% to US$1.2bn. In constant currency terms, however, and after excluding the US$206m one-off costs and operating loss associated with the Novartis’s flu vaccine business, underlying net profit was up 5%.
Management expects net profit to rise 11% in 2017 assuming stable exchange rates, and earnings per share are likely to grow slightly faster due to the company’s ongoing share buyback. CSL bought back $924m worth of its shares this year, meaning shares outstanding have now declined by 23% since 2009.
The board is currently considering a new $500m round of buybacks for 2017, though, strangely, management also signalled its intention to raise US$500m in a private placement. We're not sure of the logic here: if the company needs money, why not just stop the buyback and save the advisory fees? There may be a tax benefit and management has a strong track record on the capital management front. We'll give CSL the benefit of the doubt for now and, in the meantime, try to figure out the rationale behind it.
The stock has more than tripled in the five years since our initial Buy recommendation on 18 Mar 11 (Long Term Buy – $33.97). With a clean balance sheet, several competitive advantages and a reasonable forward price-earnings ratio of 25, we continue to recommend you HOLD.