EUR 850.00 For Business Accounts Only

Morningstar | CSL’s R&D Investor Day Supports Our Enthusiasm for the Strategy and Growth Outlook

CSL’s annual R&D briefing affirms our positive view of the strategy with the company continuing to grow and advance its future product pipeline. CSL has been impressively efficient in developing new products to market, launching five major products within the last three years. These products are early into commercialisation, continue to increase penetration in existing markets, and are being rolled out into new jurisdictions. This should see CSL well placed to continue to grow its market share, particularly in the core immunoglobulins and specialty products markets. We reiterate our AUD 207 per share fair value estimate for narrow-moat CSL and anticipate high-single-digit revenue growth for the next five years.

Underlying market demand for global immunoglobulins, or IG, CSL’s key market accounting for nearly half of the firm’s revenue, continues to grow at high-single-digit rates. This is underpinned by improved diagnosis, emerging market growth and penetration, and continued market supply tightness. CSL anticipated the potential IG supply shortfall and has added collection capacity both ahead of demand and at a faster rate than competitors. This leaves CSL well placed to continue to benefit from the underlying growth in applications.

We have made only minor changes to our valuation model and leave our AUD 207 per share fair value estimate unchanged. The recent rise in the AUD/USD exchange rate from 0.71 to 0.73 is a minor headwind; however, we think solid progress in the R&D pipeline is an offset. Key new IG products, Hizentra and Privigen, have moved from Phase III trials to registration in Japan. The firm's quadrivalent Afluria flu vaccine has similarly moved to registration in Australia for children under four years. Two potential new flu vaccines have moved to Phase III trials, as has CSL 964, which targets acute graft versus host disease. CSL 312 has progressed to Phase II trials after Phase I trials showed it was safe and well tolerated.

The firm boasts strong competitive advantages based on cost advantage and intangible assets. CSL is the global market leader has scale in the collection of blood plasma and the production of blood-plasma-derived immunoglobulins. This underpins a cost advantage as it’s difficult for new entrants to generate the scale required to achieve low unit costs sufficient to compete with CSL and its two large peers.

The firm’s intangible assets cover a range of proprietary products used to treat conditions such as immune deficiency, haemophilia, and rare diseases. Approximately 85% of CSL’s revenue and nearly all profit comes from the moaty blood products focused CSL Behring division. The remainder is from CSL’s vaccines business Seqirus, which is in turnaround. The R&D progress supports our thesis that the business will continue to improve with a number of new product innovations in the pipeline. The focus on growing mammalian cell-based flu vaccines, as opposed to those grown in egg, should see increased flu vaccine effectiveness. CSL is targeting the aggressive H3N2 strain, which is associated with an increase in the number and severity of flu cases when it appears.

We have rated CSL with a narrow moat historically, given the firm has a relatively narrow product suite, modest patent protection, and the ability for peers to develop close competing products. The product portfolio is broadening, and the commitment to R&D means the firm is bringing more differentiated and novel products to market. The industry structure is favourable, and it’s hard to imagine the moat will be broken down by a new entrant attempting to replicate CSL’s current collection and processing capabilities. We’re confident in the intangible assets and cost advantage based on scale efficiencies.

However, it’s over a 20-year timeframe where we think there is a risk of novel solutions eroding returns for CSL. Competing treatments could come from other biotech or pharmaceutical firms beyond CSL’s direct competitors. In the very long term, there is a risk for blood product substitutes to be developed that could greatly reduce the need to collect and process human blood, eroding the firm’s cost advantage. For this reason, we still think a narrow moat rating, rather than wide, is appropriate. However, we contend it is one of the stronger narrow-moat rated firms that we cover.