Australia | May 10 2013
– Baxter AD trials lack efficacy
– Brokers not ascribing AD value
– CSL sell-off ignores underlying value
By Greg Peel
Let’s just get this bit out of the way first, because if you’re like me, your head pretty much starts to spin early in any typical biotech company report, not just because of long mouthfuls of scientific names but also because in abbreviating those names and/or branding company products, biotechs have an extraordinary ability to create even more reader-unfriendly names.
CSL Ltd ((CSL)), previously the government-owned Commonwealth Serum Laboratory, collects blood from blood donation centres and separates it into its constituents. The plasma collected is used to produce protein products that act as antibodies against bacteria and viruses, assist in blood clotting, work as vaccines and antivenoms and so on. Prominent among these is albumin, immunoglobulin (Ig), intravenous immunoglobulin (IVIG) and recombinant Factor 8 (rFVIII).
In recent years, CSL, which dominates markets in Australia, the US and Germany (directly or through distribution arrangements), and its global competitors have been studying the potential use of Ig products to treat Alzheimer’s disease (AD), the path to dementia. Little is known about AD and its causes, which puts AD at odds with the likes of haemophilia, for example, as a disease treatable with Ig. In short, successful treatment of AD with plasma products is a bit of a left field concept, albeit plasma products are being used to treat other neurological conditions.
Which is why biotech experts and stock analysts in the biotech sector have never really ascribed any value to the development of successful AD treatments when pricing biotech stocks. Not that success is valueless, rather most are sceptical to start with and know it will take a lot of research and testing before a viable product is released to the market, if ever. Analysts do not dismiss AD product research, but consider its value a free option, within stock price valuation, that may or may not ever be exercised.
Analysts will thus often suggest that the market is not ascribing any value to AD opportunity as well. This is nevertheless more broker-speak than reality. What the analyst is really saying is that based on the current share price, the activities of the plasma company outside of AD product development are enough to justify the share price as it is, and hence no “premium” has been priced in for the AD option. It could also mean the market is pricing core activities below the analyst’s valuation, and adding back a premium for the AD option, but then it becomes a case of pointless hair-splitting.
Clearly the market is pricing in some premium for CSL’s AD product development, because when rival Baxter International announced on Tuesday night that Phase III trials of its own Ig treatment for AD had failed to show sufficient efficacy, and that the company would now go back to the drawing board for a rethink, CSL shares reopened on Wednesday morning down over 5%. The implication here is that if Baxter can’t find a link to Ig and AD treatment, no one, including CSL, is likely to either.
As to whether the AD option premium was thus worth specifically 5% is not a viable conclusion either. CSL is one of those defensive stocks which have been pushed to lofty price levels recently, such that at the first sign of trouble, nervous investors and trigger-happy computers are ready to dump and run.
“We have never believed Ig for Alzheimer’s would work,” said Citi’s US stock analysts this week, “and after a rise in enthusiasm a year ago, most Street commentary has turned cautious over the past six months”. The AD rethink has not evoked forecast changes with regard to Citi’s Baxter numbers, and the broker retains its Neutral rating on the strength of the company’s underlying business.
The same is true for Citi’s European stock analysts, with regard to Spanish plasma company Grifols. Grifols shares went the same way as CSL’s on Baxter’s AD news, falling 7%. Again, the Citi analysts have not changed their view on Grifols underlying business, and retain a Buy on the stock.
Given plasma treatments are already being used to treat other neurological conditions, the fact Baxter’s AD trials have proven disappointing does not detract from the value of products already being sold in the neurological field as far as BA-Merrill Lynch is concerned. An AD product would have incrementally added to this list, but Merrills has ascribed no value to such potential to date in its CSL assessment, considering any possible success to be too far into the future to impact on current pricing.
Merrills has retained its Neutral rating on CSL post the Baxter news, as has UBS. UBS is another broker not ascribing any value for AD potential, although the broker does note a glimmer of hope in the trail results for early onset victims. The analysts nevertheless assume CSL’s 5% share price tank confirms the market was ascribing at least some value for AD, but like other analysts they have made no changes to their fundamental valuation.
Other than the Baxter announcement, this week also featured data from the US plasma industry body suggesting Ig sales have slowed. Brokers are never quite sure how to reconcile these numbers given they often do not correlate with plasma companies’ own figures. There have been no changes to FNArena database ratings this week, with Citi retaining a longstanding overvaluation Sell on CSL and the other brokers split 3 to 4 on Buys and Holds.
The consensus target price has actually ticked up to $58.52 from $58.19 to suggest 3.6% downside from yesterday’s closing price.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
