Margin Outlook Grows For Key CSL Products

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CSL is benefiting as new products replace older lines and new specialty treatments come on board, upgrading guidance and widening the margin outlook as costs are lowered.

-Upgraded FY18 guidance on the back of strong sales of Idelvion, Haegarda and Seqirus
-Positive mix of products should support gross margin expansion and maintain growth trends
-Pre-emptive expansion in plasma market appears to brokers well-founded
 

By Eva Brocklehurst

Strong sales growth of high-margin products and a severe flu season in the northern hemisphere has prompted CSL ((CSL)) to substantially upgrade its guidance for FY18.

The company is benefiting from a shift in product mix as these new high-margin products such as Idelvion and Hizentra replace lower margin products such as Helixate and Carimune. New specialty treatments such as Haegarda and Kcentra are also key inputs to growth.

CSL expects to deliver constant currency FY18 net profit growth of 26-28%. The company has upgraded its guidance as a result of strong sales of Idelvion (haemophilia B therapy), Haegarda (prophylactics treatment for hereditary angioedema) and contribution from the severe northern hemisphere flu season in the case of Seqirus.

Credit Suisse estimates this CSL Behring "high-margin" portfolio accounts for around 39% of Behring sales in FY18 and will increase to around 44% in FY19, contributing to around 40 basis points of gross margin improvement in FY19.

Following the update, UBS increases earnings forecast by around 4.5%. The cost of producing several of these major products is low and the broker expects material expansion in the margins for Behring.

Regarding FY19, UBS believes expansion of Idelvion and Haegarda sales, and a continued shift to Privigen and Hizentra in immunoglobulin from Carimune, will support another year of robust earnings, even with a more modest contribution to growth from Seqirus.

The company has raised FY18 profit guidance by 8% at the mid point to US$1.68-1.71bn. Morgan Stanley suspects the strength in the share price and the P/E ratio before the update, of around 36x for FY18 forecast,s demanded guidance be upgraded. The main debate, in the broker's view, is the contribution from the FY19 flu season.

Citi upgrades its estimates mainly because of the better margins that are expected from strong growth in Haegarda and Idelvion. Better-than-expected product sales did not come as a surprise as sales data and feedback from physicians suggested Idelvion was gaining market share.

The broker suggests this product is well differentiated and likely to become the preferred treatment for haemophilia B. Haegarda is strong, too, as patients transition from legacy IV therapies and the company is unable to fulfill all the demand at this stage.

Expenses

Morgans has no doubts about the strong performance of the business but suggests Idelvion/Haegarda sales are likely to experience increased competition in FY19 and gains in Seqirus, while not totally unexpected given the severity of the northern hemisphere flu season, may not recur in FY19. Moreover, the limited R&D expenditure in FY18 has been pushed out into FY19.

The upgraded guidance appears substantial but Morgans notes the core plasma business did not contribute to the upgrade and second half growth appears to be slowing, The broker estimates around 80% of this upgrade was driven by gains that either will not recur or are the benefits of delays and makes a modest uplift to its FY18-20 top-line estimates of 2.9%.

Citi gives the company the benefit of the doubt regarding the phasing of some R&D expenses, suggesting it is unknowable what proportion of the upgrade was due to this aspect. If it concerned the greater part the broker expects the company would have made this clear, and therefore assumes a vast majority of the upgrade was from higher margins because of the sales mix.

Ord Minnett expects the positive mix mentioned in the update should support gross margin expansion and confirm a multi-year trend. Operating margins should also lift in FY18 because of the phasing of the expenses although the broker suggests the trend will moderate in FY19.

Deutsche Bank agrees some factors could pose a headwind in FY19 such as higher R&D and a weaker flu season. The broker acknowledges the shift in mix to higher margin products but continues to rate the stock as Hold, given the low total shareholder return implied by forecasts.

Plasma

Ord Minnett believes the increased guidance is a confirmation of the company's foresight and aggressive investment in plasma collections and fractionated in capacity.

CSL has been responsible for around 48% of the 211 collection centres opened in the US between 2015 and 2018, which suggests to CLSA that market share gains are likely to be maintained. As the collection centres mature, so the company's cost base declines. UBS also notes CSL has moved ahead of the market in terms of plasma collected and fractionated.

The company intends to aggressively expand the centres and the broker suggests it is well-placed to grow revenue ahead of the market. Citi retains a preference for the stock because of the plasma industry is attractive with its FY17-20 compound earnings growth rate of 20%.

Macquarie agrees that the company's plasma collection network is a competitive advantage that will allow it to meet robust immunoglobulin demand as well as the increased volumes from expanded indications. Current multiples may be elevated relative to historical average but the broker believes CSL is well-positioned compared with domestic healthcare peers on a PE/growth basis.

CLSA increases forecasts, driven by HPV vaccine royalties, improved CSL Behring revenues and declining costs. The broker, not one of the eight monitored daily on the FNArena database, has an Outperform rating and $200.65 target.

FNArena's database shows five Buy ratings and three Hold. The consensus target is $187.31, signalling 0.7% upside to the last share price. This compares with $168.25 ahead of the update. Targets range from $155 (Morgan Stanley) to $215 (Citi).

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