CSL: Result 2017

CSL is a special kind of stock, known as a ‘150-bagger'. Its share price has increased 15,000% since listing in 1994 and is up four-fold since we last upgraded it to Buy in 2011. There is indeed a time in almost every stock's life when you need to let go and sell. That time is not now.

The blood products maker had an excellent year, and we're hard pressed thinking of any other hundred-year-old companies that can consistently turn out double-digit earnings growth. Revenue increased 15% to US$6.9bn after removing the effect of currency fluctuations, with underlying net profit up an even more impressive 24% to US$1.3bn.

Revenue for CSL's plasma-derived antibody products – which help to prevent infections when a patient's immune system isn't functioning properly – grew 14%. The company's two flagship antibody therapies did well: Hizentra, which allows patients to use a portable pump to self-administer their antibody dose by injection under the skin, saw a 10% uptick in sales; Privigen, an intravenous antibody treatment, grew sales 21%. 

Albumin sales increased 7%, with most of the growth due to CSL's expanding distribution network in China. Shortages of albumin and antibodies are common in Chinese hospitals, particularly those in rural areas. To take advantage of this, CSL is inflating its distribution network beyond large city hospitals to smaller regional ones. Chinese sales were up 13%.

CSL is currently restricted to selling only albumin in China, but its recent purchase of China-based Ruide will make it the first ‘Big Three' plasma therapy maker to have local operations capable of selling antibody products. The Chinese antibody market is arguably CSL's biggest opportunity and could propel sales growth for many years.

‘The China plasma market was estimated to be $3.3bn in 2016 with an annual growth rate of about 15% for the past five years. It is the fastest-growing [antibody] market in the world. In terms of volume, it's second only to the United States,' said chief executive Paul Perreault.

Haemophilia anchors growth

The company's haemophilia division was a let-down with sales increasing just 4%.

Sales for flagship product Helixate – which is a man-made protein to prevent excessive bleeding – declined as patients switched to similar, more convenient products from competitors Biogen and Sobi. However, management noted that Helixate is low margin and so has a smaller impact on earnings.

Sales of the company's new generation of man-man ‘recombinant' hemophilia products offset the decline – but only just. There are, however, signs that things are picking up. Some two-thirds of patients switching from the previous generation of Factor IX products are converting to Idelvion, CSL's new long-acting Factor IX therapy.

Specialty products impress

Sales of specialty products – which typically treat ultra-rare diseases and have ‘orphan drug status' – increased a hearty 20%. Sales of Kcentra – a drug that reverses the effects of an anticoagulant for patients who experience major bleeding during surgery – jumped 35%. Management put it down to better education of specialists in US hospitals, who were then more comfortable using the drug.

Sales of CSL's other major specialty drug, Berinert – which treats a rare disorder that causes swelling of the face and extremities – was up a similarly impressive 31%.

A surprising driver of the big profit jump was research and development (R&D) spending, which increased only 5% to US$645m (though it has more than doubled since 2011). Management said that research spending may require a big boost in the next couple of years depending on how ongoing clinical trials go for CSL-112, the company's new cholesterol-fighting drug.

CSL recently completed an additional Phase 2 trial and is awaiting results. Management said it would make a decision on whether to progress to Phase 3 later this year – and, whatever it is, investors should prepare for a large share price reaction. A Phase 3 clinical trial for CSL-112 would take around four years to complete and will require 12–15,000 patients – 10 times as many as necessary for Phase 2. The trial might cost something between US$250m and US$500m, so requires a major vote of confidence.

Management expects revenue to grow 8% in 2018 and for net profit to come in at US$1,480–1,550m, up around 13% at the midpoint of that range. The stock sports a forward price-earnings ratio of 29 at current exchange rates and, with plenty of competitive advantages and a clean balance sheet, we're sticking with HOLD.