EUR 850.00 For Business Accounts Only

Morningstar | CSL’s Narrow Moat Intact, but Lowering FVE to AUD 195 on a More Moderate Growth Outlook

We lower narrow-moat CSL’s fair value estimate to AUD 195 from AUD 212 based on a more moderate growth outlook both in the near term from pipeline launch dates and the long term due to threats to the plasma industry from alternative therapies. Lower revenue forecasts are partially offset by a revision of our cost of equity assumption to below average at 7.5% from 9% based on the low systemic risk and limited financial leverage. We increase our stewardship rating of CSL to Exemplary from Standard based on its track record of generating shareholder value through excellent capital management. CSL screens as slightly overvalued at current levels.

Growth in volumes in the immunoglobulins segment from new indication approvals for neurological conditions and higher dosing is the main driver of our five-year 7.9% revenue growth forecast. Immunoglobulins are used to treat immune deficiencies and recently gained approval in the treatment of chronic inflammatory demyelinating polyneuropathy (CIDP), a neurological condition. This segment currently contributes 40% of revenue and we anticipate this increasing to 45% by fiscal 2023. Headwinds from competitor products are expected in the haemophilia and specialty segments in the near term, tempering our expectations of revenue growth.

We forecast EPS CAGR of 10.5% forward to fiscal 2023 and expect the dividend payout ratio of 45% to remain unchanged. New product launches, the turnaround of the vaccines business and a strong U.S. dollar boosted earnings over the prior two years. We expect more limited new product launches from CSL over the next two years. Fiscal 2020 will be disrupted by the change to direct distribution in the China which reduces our EPS by AUD 0.29, or growth rate by 4.8%, in that year. Annualisation of the shift will result in a bounce back in earnings in fiscal 2021.

CSL continues to invest over 20% of revenue in R&D and physical capacity. The R&D pipeline makes up AUD 17.60, or 9%, of our fair value estimate. We have reduced the valuation of key pipeline product CSL112 to roughly AUD 13 from AUD 40 based on a narrower view of the addressable market to exclude chronic heart disease patients, where statins and PCSK9 inhibitors are becoming the standard of care. Nonetheless, we raise our estimated CSL112 pricing based on the more focused sub-acute market being an uncontested space.

The plasma industry is currently experiencing shortages with market volume growth estimated in the high single digits which we expect to persist in the near term and moderate to between 6% and 8% growth over the longer term. CSL is well-positioned having invested significantly in plasma collection and fractionation facilities. The industry has long lead times to expand capacity as it takes two to five years to build and gain approval for a plasma collection centre, as a result we expect market share gains for CSL in the near term. CSL owns and operates over 30% of plasma collection centres globally and we expect market share in immunoglobulins to trend to towards the low thirties from a current estimated 28.5%.

CSL’s narrow-moat stems from its successful R&D platform which has produced commercially valuable products and the cost advantages afforded by its scale of production. The industry has high barriers to entry and we don’t foresee major disruption to the oligopoly trio of CSL, Grifols and Shire (now a subsidiary of Takeda Pharmaceuticals) in the next five years. The major threats to plasma products are recombinant products, which treat the same disease but are not plasma derived, and gene therapy, which promises to cure rather than treat diseases. These long-run threats could ultimately impact CSL’s existing markets significantly, precluding us from awarding the company a wide moat rating.

Nonetheless, CSL has an excellent R&D track record and added a gene therapy platform to its portfolio via the acquisition of Calimmune in fiscal 2018. Haemophilia is the only market where recombinant products have taken hold and CSL successfully negotiated this transition via its own R&D efforts. Both CSL and other biotech companies are trialing alternative therapies in other market segments. Strategically CSL is positioning itself to evolve with market shifts.

The key risk to our valuation is a breakthrough for treatment of the diseases currently being treated with plasma therapies sooner than beyond the five-year horizon we anticipate. This would leave CSL heavily invested in plasma collection and fractionation capacity that cannot be repurposed.