CSL FY24—The game is not the same
The result was not great but not bad either, 1% below my revenue forecast, and 2% below the NPAT line. The guidance for revenue growth is 5-7% and NPATA is to be $3.2-3.3B. The NPAT guidance implies about 12% growth but the revenue growth would have disappointed. In recent years CSL has struggled compared to the old CSL and a large part of that is the impact of C19 which made plasma collections extremely difficult and after that very costly. This was a problem for the whole industry not just CSL. There are other issues, IMO, that are causing CSL to appear to struggle to get their numbers up that seemed effortless in the past. Why?
Lets go back to the basic model which made CSL such a great business and drove very strong growth and a PE re-rating. The model was that CSL could collect plasma and became very efficient at it (and still is). The processed plasma, at great expense, was then sold mainly into IG products. The process was capital intensive and needed to guard against many issues such as meeting high regulatory standards etc. Therefore it was a specialised business in which CSL led the world. however, there was an added advantage of this process. Not all the plasma was used in this process and the expensive offcuts were not utilised. CSL's R&D effort targeted these “low-cost” resources. Albumin is a commodity-style product produced but there was also a whole range of haemophilia drugs as well as very high-margin specialty drugs. With this model, CSL could formulate “waste” into gold and use it to drive extraordinary returns. The active utilisation of these “by-products”, together with CSL’s successful R&D expenditure improved the economics enormously making CSL a powerhouse. I can only imagine what the ROI’s were on some of these products.
Now let's look at the mix of IG revenues to the rest of Behring. The rest are Speciality, Albumin and Haemophilia. Remember that these are the cream on top, while IG although very lucrative is an intensive physical asset and working capital business. Note I am using revenues here as a proxy for volumes. But it shows the change in the mix. What we are seeing here is an outperformance by the IG business. That is good and bad, good that CSL is growing the business very well, and bad that the cream is lagging in the mix. The super profit growth is falling as a percentage of the whole. The IG growth is very capital and inventory-intensive so of lower quality. We want to see a flat line, that is, production in balance. Only C19 has interrupted the progression over the last six years.
Why is this occurring? My view is that CSL had an absolute purple patch in the mid-2010s. the ability of the company to come up with winner after winner in haemophilia but especially Speciality drove the excess returns. Unfortunately, the hit rate in the past few years has not been as good. CSL112 may have changed that but it was not to be. This is the real return CSL gets in its R&D, which is difficult to forecast and measure, CSL can spend the money but the returns are not certain.
The inability to grow speciality et al at the historical rate will put pressure on management and may explain a few decisions. One outcome is more capital intensity, I calculate that 40% of FCF has gone into internal capex, a large number, more like a manufacturer rather than an IP-heavy company. In the last result note the move to use third-party contractors, to save costs and reduce capex. The use of outside third party manufacturers comes with risk as well. In the past CSL would gold plate their facilities to guard against manufacturing issues now management appears willing to run that risk.
Secondly, it leads to a strategy to diversify and look to M&A for growth. However, with M&A comes all the issues of entering a new market and attempting to establish a dominant presence. The Vital results so far have not been great and usually a poor start is not a great sign.
Some may point to the successful Seqirus acquisition and CSL did a mighty job buying a poor business at a low price and turning it into a sustainable and profitable business. I don't see many similarities to the last acquisition. In fact, I would see a change in management at Vifor as a positive in that CSL realises they have much to do and need to be proactive.
CSL has an outstanding history (see chart) and the business has a dominant position in the IG industry which is growing strongly. The issue is that replicating the past success has become quite difficult for the group. IMO. That may lead to a reassessment of the multiple that CSL trades on. CSL traded for ages in the 20X range and then got rerated into the +30X coinciding with the outstanding results in the purple patch described above that produced highly profitable revenue streams.
What can help hold the multiple?, one is to improve the hit rate on R&D. I will be looking for progress and success here. As I pointed out above CSL112 could have turned this around. Behring is still recovering and I do believe that CSL will get margins higher in the IG business. Not too sure about Vifor, Speciality or Seqirus all growing strongly again. If somehow CSL gets these businesses going again then that would help.
At best, I see CSL growing with earnings, which isn’t bad, but believe the multiple will be put to the test unless the issues raised above turn positive. At $300 I see around 6% pa SP over the next five years.
I see Mark Dehring (IR CSL) is retiring. Makes me feel old, lol. I clearly remember a conversation I had with him many years ago. CSL was buying back a lot of stock around $100ps while the brokers had FV around the same SP. I asked him what they were missing, and he said they were undervaluing the R&D pipeline. I wonder if he would say the same now.
I hold it but not at a huge weight. This is no basket case.
Could be wrong do your own research
Strictly for those interested in getting into the detail.
In my earlier posts on $CSL, you could be forgiven for thinking that I see the approval of Garadacimab (CSL312) as the "great white hope" for $CSL's future. So, I thought I should briefly expand to explain why I say that the "devil is in the detail."
In June, JP Morgan published the following table, showing the competitive playing field for treatments for hereditary angioedema (HAE):
According to my AI business analysts (Claude and Perplexity), the current market size for HAE is $2.9bn forecast to grow to $5.5bn by 2032. The current market leader is Tahhzyro with current annual sales of $1.2bn and still growing.
CSL doesn't break out current sales for its existing treatment, Haegarda, but my estimate from data provided over time is that it is in the vicinity of $1bn - likely the clear #2. (Consistent with commentary from various analysts).
So while the Phase 3 study for CSL312 appears to show the product is highly effective, there are existing products in the market and, in the success case, CSL312 will potentially cannibalise Haegarda to some extent.
I'm confident that $CSL are positioning the product with the FDA and payors effectively so that the efficacy-price tradeoff leads to approval. But what will approval mean?
It seems reasonable to assume that CSL312 could over 3-5 years become a $0.5-$1.5bn drug, less erosion of Haegarda. But what then? There is a new generation of treatments hard on its heals, including drugs with similarly promising efficacy at Phase 2. These could be in the market from 2027 onwards.
No doubt the SP for $CSL will kick-up when the approval comes through. But unlike a $TLX, $NEU or $BOT which each have relatively low existing revenues, $CSL already has sales of $14.8bn. Even a $1.5bn of incremental sales achieved in 5 years represents an incremental CAGR on revenue of only 2%. However, its not a slam dunk they will get there and it is almost impossible to do a comparison across the products from the published clinical data.
Such is the tyranny of growth!
There's still Filspari to look forward to from Travere Therapeutics. CSL will start marketing to Europe and pay 18m to Travere
But don't get your hopes up. Filspari will probably bring in around $100m from the US for Travere (still own the US rights) this year alone.
Of course there is still the hope of Filspari approval for FSGS which is currently dominated by Rituximab.
Kidney treatment development is a tough place to be when every Renal specialist either prescribes Forxiga or Rituximab.
And I guess everyone is sick of hearing the drug Rituximab - especially the DXB holders.