CSL Primed For Additional Market Share

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Supply issues with competitors are expected to support vaccine and blood product supplier CSL's volume and market expansion.

-Undersupply now apparent in raw plasma market and likely to persist for a time
-Substantial rise in capital expenditure to establish recombinant manufacturing facility
-Favourable trading terms expected to continue for the longer term
 

By Eva Brocklehurst

A problem with supply for small-medium fractionators is expected to support vaccine and blood product supplier CSL's ((CSL)) expansion. For its part, the company has raised the tempo of its operations, brokers observe, accelerating the opening of plasma collection centres to double its fractionation capacity by 2024.

On UBS estimates, 2016 raw plasma collections grew around 5-6% and there is no new incremental allocation to low-priced and emerging markets. Hence, the under-supply that is now apparent. The last under-supply cycle occurred in 2006-09, which the broker notes was ended only by a significant increase in US unemployment, which accelerated collection growth and pushed many collection centres to capacity.

On UBS estimates, net output of IVIG (intravenous immunoglobulin) was above demand from 2010 and thereafter the market sought to restrict collections, a factor which may have reduced the visibility around the needs of future collection centres.

Exacerbating the current short supply, the opening of new US collection centres, while accelerating, will take over two years before they make a meaningful contribution to the collection pool. The bottlenecks will, therefore, persist for over two years, the broker asserts, in part reflecting competitor inability to plan and allocate capital ahead of rising regulatory requirements. UBS believes global demand can sustain 5% volume growth for around seven years in both IVIG and albumin.

The company's site visits hosted in Germany and Switzerland highlighted regulatory restrictions and capacity constraints are now easing. At the 2013 visit to Switzerland, Credit Suisse noted management's intention to open 10 plasma centres that year and 30-40 centres per year over 10 years if the business continues to grow at a compound 6-8%.

The broker believes growth for the IG product has run ahead of expectations, while competitors have expanded plasma collection at a slower pace. Credit Suisse's feedback also suggests the market for raw plasma is tight and fractionators are selling IG as quickly as it can be produced.

While agreeing CSL is in the best position across the industry to respond to opportunities to gain share, Morgan Stanley notes that US collection centre numbers increased around 20% in the December quarter and this could result in a material bump up in supply in 2018.

The broker also observes a material jump in capital expenditure in FY17 to US$800m, which is driven partly by the establishing of the Lengnau recombinant manufacturing facility which is to be ramped up in 2020/21. This will be used to manufacture both Idelvion and Afstyla as well as products in the developmental phases. For the broker this demonstrates a partial move away from relying solely on plasma, although it indicates the arrangement for producing Idelvion/Afstyla may detract from margin for a little longer.

Outlook

Morgan Stanley believes out-sized growth, driven by the prior regulatory issues and capacity constraints, will drive FY17 earnings towards the top end of growth guidance at 18-20%, but create a 7% headwind for FY18 net profit.

The company's Seqirus flu vaccine can achieve profitability in FY18, UBS suggests, and the company could reach its original guidance of US$1bn in sales by FY20, at a 20% EBITDA margin.

CSL launched two key long-acting haemophilia products in 2016 and this is envisaged adding upside to the business. Despite competitive price pressures on the recombinant FVIII (rFVIII) product the broker expects CSL to make gains in both earnings and margin.

The company's Afstyla rFVIII is considered to be less well differentiated, although it appears to be retaining over 25% of former Helixate patients. Meanwhile, US feedback suggests to the broker that Idelvion, the company's long-acting rFIX, is gaining share while the two-week long-acting product is being recognised as the best in its class.

UBS has found that markets tend to ignore forecasts for drug company earnings in the forward years 4-5. In fact, the broker contends that drug industry earnings are predictable, given relatively stable pricing along product life cycles. Therefore, consensus forecasts for the out years contain unexploited information. The broker believes favourable trading terms for CSL should persist into the longer term and raw plasma collections can sustain high-single digit compound annual growth.

FNArena's database shows four Buy ratings, and two Hold. The consensus target is $128.14, suggesting 2.9% upside to the last share price. Targets range from $112.00 (Morgan Stanley) to $136.40 (Citi).
 

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