Australia | Mar 24 2020
How exposed is CSL to disruptions to its plasma collections?
-Virus containment measures could lead to reduced volumes of plasma
-Drop in plasma collections the main risk to forecasts, perhaps not immediately
-Increased awareness of respiratory illness could mean higher uptake of flu vaccine
By Eva Brocklehurst
The risks for CSL ((CSL)) in the face of the coronavirus (covid-19) crisis are considered manageable. The outperformance in the stock relative to the ASX200 over recent weeks suggests a view that the company is less exposed to disruption.
However, CSL is yet to provide an update and there is some risk for blood plasma collections. CSL sources plasma in the US and EU, where containment measures could lead to reduced volumes as people choose, or are forced, to stay home.
UBS points out the US supplies around 75-80% of globally-sourced plasma. A 28-day restriction on donating by people diagnosed with covid-19 has been implemented at government blood centres and could result in a temporary decrease in raw material. UBS assumes this applies to US commercial centres as well.
The closure of the US/Mexican border to all but essential travel will have implications for plasma collection as there are a number of the company's collection centres that rely on Mexicans, Ord Minnett points out.
Importantly, essential travel includes medical purposes, attending school or engaged in trade. The company is expected to seek collections elsewhere to offset the loss even though, as broker estimates, the border region accounts for around just 5% of collections.
UBS assumes a -5% reduction in raw plasma collected over the next 6-9 months and calculates around 9% of all centres are situated close to the US/Mexican border. The company's largest US footprint is Texas, with 30 collection centres.
Of significance, plasma collection has been deemed part of the US critical infrastructure and, with the economic challenges for the broader population becoming apparent, there should be no shortage of donors.
Ord Minnett asserts CSL will need to raise awareness of the available cash payments for donations to ensure collections continue. Nevertheless, social distancing and general shut-downs are likely to curtail plasma donations and it remains to be seen if this will be offset by the availability of cash payments.
To assess the potential impact on earnings, Morgan Stanley runs a scenario that assumes a 12-month reduction of -10-30% in current collection forecasts. There would be no impact to FY20 estimates, a small impact on FY21 and -8-24% downside to FY22.
The broker concedes that given the reliance of donors on remuneration and the company's ability to increase fees, this scenario is probably too pessimistic. Nevertheless, this is the biggest potential source of risk for CSL and, while it may not have a significant impact immediately,could put FY21 and FY22 expectations at risk.
UBS also contemplates several scenarios over six months. Specifically, to have an impact on immunoglobulin and albumin production, plasma collection volumes would need to fall over fivefold, assuming demand remains unchanged. The broker also assumes consumables supply remains adequate. In a worst-case scenario, UBS calculates FY21 CSL Behring operating earnings forecasts would decline by -23%.
The only recent precedent, the broker highlights, to gauge the impact on donors in the US, is the 2009/10 H1N1 (swine flu) pandemic where there were an estimated 60.8m cases of the disease. The broker is not aware of any discernible impact on donated plasma volumes during this period.
The number of H1N1 cases implies around 20% of the US population was affected. In a scenario where more than 50% of the population was infected by covid-19 this would then pose a higher risk to plasma supply compared with that which occurred with swine flu.
While the seasonal influenza vaccine does not provide protection against covid-19, increased awareness of respiratory illnesses could mean increased uptake of the vaccine, Morgan Stanley points out.
This may translate into lower-than-normal returns of the vaccine after the 2019-20 northern hemisphere winter. As Seqirus is around 6% of group earnings (EBIT) the broker envisages a small upside risk to earnings should FY20 vaccine returns be zero.
Meanwhile, in the US, elective surgery has been cancelled and there are reports people are deferring visits to specialists. This could lead to a slowing in diagnosis rates for disorders and conditions treated by immunoglobulin therapy and, subsequently, a drop in immunoglobulin demand.
FNArena's database has three Buy ratings and four Hold. The consensus target is $316.59, signalling 11.0% upside to the last share price. Targets range from $350 (Credit Suisse) to $260 (Morgan Stanley).
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