CSL Needs To Reinvigorate Broker Appetite

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

-Competitor disruption eases
-Ramp-up of small players
-Stock looking expensive
 

By Eva Brocklehurst

CSL ((CSL)) needs to reinvigorate broker appetites. The blood products company's performance could be easily overshadowed by major developments among its competitors. In particular, small fractionators have gained market share over 2013, in part because of the rise in the euro relative to the US dollar which has boosted the value of sales in Europe, where most of the smaller players are domiciled. Moreover, major competitor Baxter is no longer constrained by production disruptions while Octapharma has overcome the setback from a product withdrawal in 2011.

CSL was one of the beneficiaries of the supply disruption from Baxter in recent years and saw improved market share. Smaller players also rose to the occasion and are now intent on expanding sales into the attractively priced US market. Deutsche Bank is concerned that the smaller providers may focus on gaining a foothold and pay less attention to near-term profitability. The broker, in reviewing the threats and opportunities faced by CSL, notes all fractionators are planning expansions over the next few years. In its favour, CSL remains one of the lowest cost producers but, with the threat of new extended half-life haemophilia therapies imminent, Deutsche Bank finds there are few potential drivers of above-market growth. The broker has decided to downgrade the stock to Hold from Buy.

Immunoglobulin (Ig) growth continues to be strong, at around 9% per annum according to figures from the Plasma Protein Therapeutics Association. From these figures Citi notes the volume distributed during November and December 2013 was the highest monthly volume for the last six years. The other key product, albumin, was slightly weaker because of comparisons with the spike in November and December 2012. Citi believes CSL's market share for Ig could be under pressure this year because of improving supply from Baxter. The competition is heightened by the launch of Baxter's HyQvia in the US this year as well as the potential launch of a 10% liquid IVIG by Octapharma.

The main risks for CSL are associated with the deterioration in market conditions for plasma proteins, according to Citi. The broker derives a target of $62.20 for the stock, a 15% premium to the average price/earnings of the healthcare stocks under cover. A higher earnings profile, low gearing and strong return make this target appropriate but Citi suspects CSL is becoming expensive, given the medium-term growth profile and particularly because of the competitive threats that are looming for both the Ig and haemophilia businesses.

Deutsche Bank has cut CSL Behring's margin for FY14 and beyond by 0.5% to reflect lower Ig prices and a lift in manufacturing costs. Feedback from European fractionators indicates bullishness has faded from a year ago. The broker attributes this to a return to normal output at Baxter this year, after the company was short of Ig product for much of 2013. The market has now moved to a mildly oversupplied state. In terms of albumin, demand is still strong but Deutsche Bank sees little room for CSL to materially lift output.

CIMB observes that Biogen Idec's latest data on children with Haemophilia A shows continued effectiveness for long-acting drug Eloctate, increasing the likelihood of near-term approval and broadening the target population. The broker doesn't think this development will change the market but, as competitive clinical profiles, pricing and convenience are key determinants of market uptake, CSL should sit up and take notice. The product should be closely monitored for the risk to CSL's Helixate, in the broker's opinion. Eloctate's effectiveness and safety is expected to spearhead submission to the EU for approval, while offering the potential to expand the US patient population.

Earlier this year, a phase 2 trial assessing the prevention of congenital cytomegalovirus (CMV) infection found the administration of a hyperimmune Ig (similar to CSL's Cytogam) did not significantly modify CMV infection during pregnancy. Credit Suisse noted that, for CSL, Cytogam is a small contributor to the Behring business and around 1% of revenue as it's predominantly used for CMV infections following organ transplant. That said, the potential for use in preventing CMV transmission in pregnancy is significant. There is a large phase 3 trial underway, sponsored by the US National Institute of Child Health and Human Development, assessing the use of Cytogam. However, Credit Suisse thinks the result from the phase 2 trial has now cast some doubt as to whether this longer-term earnings opportunity will materialise.

There are five Buy ratings, two Hold and one Sell (Citi) on the FNArena database. The consensus price target is $72.95, suggesting 7.5% upside to the last share price. Targets range from $62.20 (Citi) to $80.00 (Macquarie and UBS).
 

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