We recently researched CSL Limited (ASX:CSL) in The Dynamic Investor after the Company reported its financial results for the six months to 31 December 2022 (1H23). With the shares having retreated from recent highs, we assess whether current levels present an opportunity.
Overview of CSL
CSL has two operating segments: CSL Behring and Seqirus. The CSL Behring segment (which accounts for ~63% of group revenue) provides plasma-derived and recombinant products, and operates plasma collection networks through CSL Plasma. CSL Behring provides treatments for people who are living with conditions in the immunology, haematology, cardiovascular and metabolic, respiratory, and transplant therapeutic areas.
The Seqirus segment manufactures and distributes non-plasma biotherapeutic products and develops influenza-related products. Seqirus is one of the largest influenza vaccine providers in the world.
On 9 August 2022, CSL completed the US$12.3b acquisition of Vifor, a Swiss-based specialty pharmaceutical company, primarily focused on anaemia management and renal disease.
Key Fundamental Drivers
Plasma Volumes Growth Ahead of Competitors
CSL Behring’s revenue increased by +19% in 1H23, up from -9% in 1H22. This highlights improved plasma collection volumes and strong demand, especially from Europe and emerging markets.
Plasma collection growth of +36% in 1H23 is now 10% above pre-COVID levels, with collection centres still being underutilised relative to pre-COVID levels. The key factors underpinning the strong growth in plasma collections include the re-opening of the Mexico border (allowing Mexican nationals to donate plasma in the US on visitor visas), as well as targeted marketing and digital initiatives by CSL to attract donors.
CSL Behring seems to have outperformed competitors on plasma collections. The +36% growth in plasma collections reported for 1H23 is ahead of: i) The +25% growth reported by Grifols for the nine months to 30 September 2022 and Sep-22 and ii) Takeda’s guidance of +10-20% in plasma donation volumes for the 12 months to March 2023.
Structural Factors Supporting Seqirus Performance
Seqirus’ strong performance in 1H23 was underpinned by a strong uptake of seasonal influenza vaccines and an ongoing shift to more differentiated products, against a backdrop of reduced immunisations. The rate of sales growth for Seqirus compares favourably to competitors. Sanofi (the #1 flu vaccine manufacturer) has reported flat sales growth, while GSK (the #3 flu vaccine manufacturer) reported -3% sales growth, noting a soft vaccination rate in the Northern Hemisphere in 2022. GSK also highlighted the “lower expected returns in the US”.
Long-term revenue forecasts for Seqirus have been upgraded on the back of increased influenza rates and CSL recently receiving approval to sell its differentiated Flucelvax product into paediatric markets.
Upside Risk to Short-Term Gross Profit Margin Forecasts
Weaker Gross Profit Margin (GPM) for CSL Behring was a key area of disappointment from the 1H23 results, as it offset a stronger result from Seqirus and a 5-month contribution from the Vifor acquisition.
GPM for CSL Behring is expected to expand from 49.1% in 1H23 to ~50.2% in 2H23, with the Company previously flagging that 1H23 would be the low point in CSL Behring GPM. GPM is expected to expand further in FY24 and FY25. While this improvement is driven by increased volume (fixed cost leverage), positive mix shift, and cost per litre as at December 2022 being down 10% from peak levels recorded in March 2022; GPM is expected to be well below pre-COVID levels of 57.8%.
Having said that, there is upside risk to GPM expansion over FY24 and FY25 (i.e. towards the historical 57-58% range) from: i) Cost per litre remains above pre-COVID levels, ii) Initial sales from CSL112 (a 2nd heart attack prevention drug) and iii) Delivery of benefits associated with the Rika platform, which is expected to benefit GPM in FY25. In regards to Rika, the FDA approved CSL’s investigational device exemption for a new nomogram, with trial commencement expected in the March 2023 quarter and potential approval later this calendar year.
Progress on Product Pipeline Supports Long-Term Growth Profile
CSL has a significant R&D product pipeline, which is considered the most promising yet. There are several potentially positive catalysts likely to emerge from the R&D product pipeline over the near term, including:
i. Results from CSL112, which is currently in Phase III trials, are expected to be released in early calendar year 2024. CSL112 is a human plasma‐derived apolipoprotein A‐I aims to reduce the risk of recurrent cardiovascular events in patients with myocardial infarction in the first 90 days after the index event by increasing cholesterol efflux.
ii. Following FDA approval of Hemgenix (Haemophilia B gene therapy), a launch in the US is expected in the near term. The ramp-up in sales is likely to be a slow and gradual process as the payment models are yet to be finalised.
iii. CSL expects the Phase 3 trial data of Garadacimab for HAE to be released by the end of February 2023.
iv. A trial for a new plasma collection nomogram is expected to commence in the March 2023 quarter, with potential approval later this calendar year.
Fundamental View
Looking beyond earnings expectations for FY23, we consider the key catalysts for the shares to be: i) Upside risk to GPM expansion for CSL Behring over FY24 and FY25, ii) Further progress on the R&D product pipeline and iii) Future results to validate the expected earnings growth contribution from the Vifor acquisition. To this end, Vifor’s sales performance in 1H23 surprised on the upside, with CSL re-iterating all prior guidance, including its cost synergy target of US$75m over three years remaining on track.
CSL shares are currently trading on a 1-year forward P/E multiple of ~28x, which is at the lower end of the range of the last five years and below the average 1-year forward P/E multiple of ~36x over the same period. With the current multiple looking undemanding in the context of forecast EPS growth of ~20% over FY22-25 on a CAGR basis, we consider CSL to be an attractive investment at current levels.
Charting View
The large consolidation from the past 3 years could be almost ending and that should lead to the stock resuming its longer-term uptrend. The breakout above $300 in early February saw the stock become overbought in the short-term and it has eased back. However, it seems to be holding in at the upper trend line that started at the start of 2022, which is a positive sign. From a charting perspective, CSL remains an attractive buy at these levels. An upside break above $300 would be the next buy signal.
Michael Gable is managing director of Fairmont Equities.
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