Tight Plasma Supply A Benefit For CSL Pricing

Australia | Jun 18 2020

CSL may be able to benefit from further price increases as plasma supply is likely to remain tight over the next several months, while brokers welcome the acquisition of Vitaeris.

-Plasma supply likely to tighten further over the next six months
-Potential for increased costs associated with hygiene initiatives
-Acquisition of Vitaeris a significant development in transplant treatment


By Eva Brocklehurst

CSL Ltd's ((CSL)) plasma collection facilities are experiencing rising collection costs per litre because of the pandemic, amid a slump in donor numbers. Fixed costs and weaker collection volumes are likely to affect earnings outcomes, although pressure on donor fees has subsided because of rising unemployment in the US.

While margins are clearly under pressure, demand for immunoglobulin products is still strong, Credit Suisse assesses. This market was already tight ahead of the pandemic and CSL was able to achieve favourable price increases in the first half.

Even greater tightness over the next six months is likely in the broker's view, and CSL may be able to benefit from additional price increases. Credit Suisse asserts the stock is cheap on a PE (price/earnings) relative basis at a 64% premium to the ASX 200 industrials ex financials.

A risk to product supply over the short term may exist but the broker believes the recent pull back in the share price provides an opportunity to accumulate a quality defensive stock with a strong medium-term growth outlook.

Macquarie is more subdued in its assessment. The US FDA has instituted alternative procedures for blood and blood components in response to the pandemic, reducing the quarantine period for sources plasma by paid donors to 45 days from 60 days.

Yet the broker considers this a one-off benefit in the production of last litre products in FY21. The drawing down of CSL's inventory has potential to boost revenue but this is already captured in forecasts. Inventory rose by around 15% in the first half, driven by a 34% increase in finished product.

Still, fewer donors and social distancing measures will prevail for some time and there is potential for increased costs associated with hygiene initiatives. Macquarie, in sum, envisages downside risk heading into FY21 and considers the stock's multiples are elevated.

Goldman Sachs believes the most compelling opportunity lies within the transplant franchise, noting the recent acquisition of Vitaeris, a clinical stage biotech. The company entered a strategic partnership with Vitaeris in December 2017 and paid US$50m. The cost of the acquisition is modest, the company asserts, and will not materially affect FY20 profit expectations. R&D costs will increase by US$30-50m in FY21.

The lead program in the joint venture is clazakizumab, a monoclonal antibody for preventing kidney transplant rejection. The current standard of care in anti-rejection treatment, immunosuppressant therapy, does not specifically target the source of the rejection, which suggests to Goldman Sachs there is a novel unmet market with limited competition.

Morgan Stanley estimates a total market size of US$1.6bn by 2024. The broker's bull case captures $20 per share upside from CSL's transplant programs that includes clazakizumab and Berinert.

UBS has not incorporated any revenue or earnings associated with the commercialisation of clazakizumab into forecasts, pending favourable phase III data. The broker anticipates commercialisation from 2023.

CSL has also entered a partnership to accelerate the development, manufacture and distribution of a COVID-19 vaccine candidate. The initial phase of any large-scale production of vaccine is planned for the company's biotech manufacturing facilities in Melbourne.

Citi assesses this would have minimal long-term financial implications, while the near-term impact of heightened efforts to develop a vaccine for coronavirus is likely to stem from increased demand for influenza vaccines.

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