EUR 850.00 For Business Accounts Only

Morningstar | CSL Exceeds Expectations and Achieves Turnaround in Seqirus Division; Raising FVE

Narrow-moat CSL ended fiscal 2018 slightly above our bottom line expectations and recent full-year guidance. Reported net profit after tax of USD 1,729 million was above the recently issued guidance range of between USD 1,680 million and USD 1,710 million, and our forecast of USD 1, 685 million, buoyed by solid product performances across multiple fronts. These included: impressive growth in the flagship immunoglobulin portfolio in the U.S.; successful launch of Haegarda; ongoing adoption of KCentra in the U.S.; and achieving breakeven in the Seqirus flu vaccine business as targeted.

We are increasing our fair value estimate by 4% to AUD 207 per share, from AUD 200 previously, after incorporating Australian dollar/U.S. dollar exchange rate of 0.73, guidance of 10% of revenue for R&D spend, and capital expenditures in fiscal 2019 of between USD 1.2 billion and USD 1.3 billion to support ongoing expansion of plasma donor sites in the U.S. This compares with our previous assumption of 11% R&D spend given the commencement of CSL112's phase 3 trial. We have also incorporated management guidance for fiscal NPAT of between USD 1,880 million and USD 1,950 million. As such, we forecast fiscal 2019 NPAT of USD 1,942 million. Our revised fair value estimate includes increased valuation of the CSL112 opportunity given time value of money considerations and now accounts for around AUD 57 per share. For further details of our assessment of the CSL 112 opportunity please see our report "Elevating Heart Rates as Potential CSL Blockbuster Enters Phase 3," published July 2018.  Nonetheless, at current levels, we think shares in CSL are trading broadly in line with fair value.

CSL's immunoglobulin portfolio, representing 40% of group revenue, performed ahead of expectations with Privigen and subcutaneous Hizentra delivering growth of 13% and 12%, respectively, year on year, in constant currency terms. This was largely driven by the expanded approval of both products in the neurological indication of chronic inflammatory demyelinating polyneuropathy, or CIDP. Hizentra, for use in CIDP, was launched in January making it the first and only sub cutaneous immunoglobulin, or SCIG, for this indication on the market. We expect the launch in first-half 2019 of Hizentra in Europe for CIDP along with the growing awareness and demand of both Privigen and Hizentra in primary immune deficiency and secondary immune deficiency indications, should support double-digit growth over the next five years and forecast a five-year revenue CAGR of 10% for the division.
Specialty products, representing 19% of group revenue, grew an impressive 24% buoyed by the launch of Haegarda in first-half 2018, the first and only subcutaneous prophylactic treatment for patients with hereditary angioedema. The uplift also included a strong contribution from KCentra, which grew 32% in the U.S. driven by increased utilisation in trauma settings for reversal of bleeding using warfarin. We remain positive on Haegarda, given its compelling efficacy profile and adoption to date, capturing around 50% of the prophylactic market in the U.S., and KCentra, given its recent launch in Japan. We expect both to support our forecast of revenue five-year CAGR of around 20% for the division.
Seqirus, CSL's flu vaccine division formed though the integration of its legacy vaccine business and Novartis flu vaccine assets acquired in 2015, representing 11% of group revenue, achieved a major milestone by breaking even in fiscal 2018 net profit, while generating USD 52 million in EBIT on revenue of USD 1.1 billion compared with negative EBIT of USD 179 million in the previous corresponding period. We think the turnaround, underpinned by the introduction of high-margin quadrivalent flu vaccines and approval of Fluad containing proprietary adjuvant MF59 in the U.K., bodes well for CSL's ability to innovate and diversify into new technologies beyond its traditional plasma fractionation expertise. Although seasonal, we believe Seqirus is well-positioned to expand beyond the U.S. given the increasing production capacity at its next generation manufacturing plant at Holly Springs, pending approval of its submission to bring cell-based QIV flu vaccine to Europe for the 2019/2020 season.

From a balance sheet perspective, CSL remains in good shape. Net cash flow from operations grew a robust 53% in fiscal 2018 to USD 1.9 billion, with net debt/EBITDA a very manageable 1.33 times. As such, we remain comfortable with CSL's ability to support capital expenditures guidance of around USD 1.2 billion in fiscal 2019 to fund: expansion of another 35 plasma donor sites in the U.S.; a key driver of raw material supply; construction of manufacturing capacity at Kankakee, Marburg and Broadmeadows; and expansion of Fluad manufacturing capacity in Liverpool, U.K. CSL declared a full-year dividend of USD 1.72, up a healthy 26%, equating to a payout ratio of 45% which we think remains sustainable over the medium term.