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Treasure Chest: CSL’s Heart Data Under Microscope

Treasure Chest | Nov 15 2016

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

Ahead of the release of important data on CSL's heart disease product, brokers acknowledge potentially substantial upside.

By Eva Brocklehurst

CSL Ltd ((CSL)) is under the microscope as it prepares to present its CSL112 phase IIb data at the American Heart Association conference. Several brokers assert there is substantial upside risk for the stock, should the primary and/or secondary end points be validated.

The product could provide immediate benefit in reducing plaque volume and inflammation, disrupting the processes that lead to further heart attacks, stroke, and death. Heart attack patients have a 5% mortality risk within 30 days and a 15% incident risk of major adverse cardiac events within six months.

There are two aspects to the data, the primary (safety) and secondary (efficacy) end points. Morgan Stanley observes a successful primary appears to be a foregone conclusion by the market, as this will assess if the product induces liver/kidney toxicity. Among secondary measures, the time to first occurrence of a heart attack will provide some signal as to how effective this drug may be in preventing secondary heart attacks.

The move forward to clinical development and commercialisation is dependent on the outcome of these end points. Tolerance of the product is largely expected and Morgan Stanley envisages a positive reaction in the stock of around 7% on a positive primary end point. The secondary end point, in terms of the recurrence of heart attacks, is more challenging and the broker is less certain, given only four months of follow-up and a relatively small study population.

A significant secondary signal would be a major positive surprise and the broker expects a reaction in the stock of around 17% is possible, although it would require validation in a phase III trial. The treatments addressing the unmet clinical need in heart disease are competitive and, the broker notes, competitor Amgen will present its full data from its Repatha study at the conference.

There are three probable outcomes from the conference, Morgan Stanley deduces. The first is if the data misses both end points, which would hit the shares by around 3% to the downside, in the broker's calculations. If the data meets the primary end point, but there is no secondary signal, this means it may proceed to a phase III, and Morgan Stanley envisages upside to its $101 target, to $111.

The best scenario is where the data hits both the primary end point and provides a good secondary signal, confirming the move to phase III. This is where the broker envisages 17% upside to its target, to $122, although the premium recedes slowly because of the long trial duration and likely new competitive developments. Morgan Stanley retains an Underweight rating.

Citi suspects that any positive news may push the shares higher and the product could be a game changer. The broker retains a Neutral rating and $110.73 target. The product could add over $1bn per annum to profit in five years after the launch, the broker estimates. Citi derives an un-risked valuation of $18/share for CSL112. This reflects both the size of the market opportunity and the high margin/low incremental production cost.

The broker expects the trial to demonstrate acceptable liver and kidney toxicity, in line with Morgan Stanley's view, and possibly a trend of reduced cardiovascular events. This could be positive for sentiment and the stock by around 3-4%, Citi calculates. Given there is little priced into the stock, the broker expects a failure of the trial would be negative but the reaction would be constrained, perhaps to a 3-5% fall.

In the best case scenario, where a dose-dependent statistically significant reduction in major cardiovascular events is demonstrated, the stock could add around $10, Citi asserts. Going into the conference, the broker envisagea the stock fairly priced, given its flu business, while poorly performing, is gradually improving and there is increasing volatility in the haemophilia market. Citi does not include CSL112 explicitly in valuation until there is greater clarity about a phase III clinical trial and a corporate strategy on the product.

The latest novel therapies to treat haemophilia will be delivered at the American Society of Hematology next month. The impact of these therapies is difficult to quantify, but Ord Minnett considers it likely that traditional factor replacement therapies for both haemophilia A and B will face significant new competition over the next decade. The broker is aware of at least 12 novel non-factor based therapies under development and the sheer number suggests re-invigorated competition is almost inevitable.

Ord Minnett maintains a Hold rating but reduces it price target to $100 from $105, to make allowance for the medium term risk to earnings estimates from the new product pipeline for haemophilia. The broker's worst-case scenario assumes the company's haemophilia therapies are largely displaced by new treatments. Such a scenario is unlikely until at least the mid 2020's but the broker envisages it prudent to adjust for the probability.

FNArena's database shows two Buy ratings, four Hold and one Sell (Morgan Stanley). The consensus target is $109.49, suggesting 7.4% upside to the last share price. S targets range from $100 (Ord Minnett) to $120.20 (Morgans).

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