Does CSL’s Share Price Reflect All Risks?

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Blood plasma collections have declined globally in the face of the pandemic. Should CSL investors be concerned?

-Plasma collection disruptions could continue
-Economics of plasma collection appear intact
-Plasma efficiency enhancement potential
 

By Eva Brocklehurst

Reduced plasma donations, particularly in the US, have been a worrying feature of the pandemic, as it is likely to lead to lower availability of a key product, immunoglobulin.

Plasma is critical to life-saving therapies to treat a growing number of diseases. The plasma is collected and then fractionated into different therapeutics. CSL ((CSL)) is one of three major manufacturers globally and barriers to market entry are very high given the expertise required and the time to build a collection facility.

Plasma donors are compensated for giving blood in the US and in some European countries. The effectiveness of increasing donor compensation is also affected by the level of unemployment. Citi estimates donor compensation accounts for around 50% of plasma costs.

A gradual recovery in plasma collection has occurred since various jurisdictions started opening up and the recovery has been quickest in China followed by Europe and then the US.

While expecting demand for plasma products will remain robust, Citi suspects there is a risk the disruptions because of the pandemic will continue. The earnings impact is likely to be felt in FY21 with a return to normal in FY22.

Given the lag between plasma collection and finished product, Macquarie assesses trends from October 2020 will start to reveal revenue and earnings for FY22 and looks for more meaningful improvement over coming weeks.

A continuation of recent down-trends in collection centre foot traffic, which on the broker's estimates sits -17% below average, would signal downside risk to forecasts.

Valuation

Yet, the decline in plasma collection volumes over the past six months appears to be priced into the stock, UBS believes, as CSL has underperformed the ASX 200 by -20%.

With a number of clinical trial milestones due over coming years, the broker focuses on the medium-term outlook and assesses, if all clinical trials are successful and end up being commercialised the stock's valuation is relatively consistent with the current price target.

In a scenario where none of the product opportunities reach commercialisation, UBS derives a valuation of $255. When aggregating both upside and downside risks the valuation is $336. Of the 91 new plasma collection centres opened in the US over the last 12 months, CSL opened 40 and appears on track to reach an FY21 target of 20-30 centres being opened.

UBS believes the number of new centres opened in the US throughout the pandemic should be interpreted as a vote of confidence in CSL. Citi also concludes there is plenty of room for the number of plasma collection centres in the US to double and notes other countries have also been increasing their numbers over time, particularly China.

The broker calculates the industry will add around 42% in fractionation capacity by 2023. CSL currently fractionates in three different locations, Australia, Germany and the US.

Citi expects a growth rate of 8-10% in plasma volumes will resume by FY22 and the global market should also absorb price increases in line with inflation. Still, while it is less likely that treatments for rare diseases will be affected by drug pricing reforms, this poses a risk for the industry.

Meanwhile, a similar level of demand growth is required for the two key end products, albumin and immunoglobulin, as "last litre economics" apply, i.e. end-use demand dictating prices and influencing production economics.

Fortunately, Citi observes the economics of plasma collection have remained intact and margins were maintained over the last three years. The broker also believes CSL can continue to grow at a faster rate than the industry because of its rapidly expanding footprint.

Plasma Efficiency

However, Morgan Stanley points out there is an investment debate centred on hypersialyted immunoglobulin, for which competitor Momenta already has a candidate, M254. Preclinical data signals this candidate has up to ten-fold activity enhancement potential.

While patient convenience is understood in terms of the new product, a relatively large volume of immunoglobulin is required as a substrate for production, which may mean a partnering program for access may be required.

Hence, Morgan Stanley suggests both company-specific and industry-wide benefits are unclear. The broker encapsulates upside and downside risks for CSL in regard to this potential candidate.

One such aspect Morgan Stanley believes is under appreciated is that the ultimate success of hypersialyted immunoglobulin could result in a significant reduction in plasma collection required and solve any “last litre” economic issues. On the broker's quick calculations, success could mean a -22% reduction in industry plasma requirements.

Flu Anyone?

One development from the pandemic has been the substantial increase in flu vaccinations. Credit Suisse assesses the pandemic is likely to promote a sustained increase in flu vaccination coverage over the next 2-3 years.

US flu vaccination coverage rates are expected to increase to 62% in FY25 from 53% in FY20. Seqirus, CSL's flu vaccine, is likely to gain industry share with seasonal vaccine volume growth of 14% and revenue growth of 19%, in the broker's calculations. This will be aided by a shift in mix, as CSL will launch Fluad QIV in the US in FY21 and in Europe in FY22.

Credit Suisse expects a significant shift to the Fluad QIV version, aiding margin. Flu vaccination rates for the elderly in the US are expected to rise even faster than the total industry and Seqirus is one of a duopoly that is expected to benefit. Seqirus achieved a 20% earnings (EBIT) margin in FY22 and Credit Suisse calculates it can operate at an average 25% margin through the cycle.

There are three Buy ratings and four Hold for CSL on FNArena's database. The consensus target is $311.11, signalling 5.3% upside to the last share price. Targets range from $282 (Morgan Stanley) to $346 (UBS).

See also, Spotlight On CSL Revenue Targets on September 14, 2020.

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