CSL (ASX:CSL): Expecting double-digit earnings growth for the rest of the 2020s

CSL is the ASX’s largest healthcare stock and the third biggest company behind BHP (ASX:BHP) and CBA (ASX:CBA). Capped at over $140bn, it is a perfect case study of how companies can create long-term value as well as juggle innovation and maintaining core parts of a business that are delivering. Not to mention what can happen to investors who buy a company when it is low and hold for the very long-term.

However, things have not been as steady in the past year or so.

 

 

Introduction to CSL (ASX:CSL)

CSL stands for Commonwealth Serum Laboratories. It was once a government entity, established in 1916, to meet the health needs of the nation during World War One. The company has a proud history, enabling many of the 20th century medical advances to reach our shores such as insulin, penicillin and flu vaccines.

It was privatised and publicly listed in 1994 at $2.30 a share, although it undertook a three for one share split in 2007 making its IPO price 76.7c in real terms, meaning it has been more than a 300-bagger since listing!

CSL, has two primary businesses: flu vaccines and blood products – it takes plasma from donors and turns it into life-saving therapeutics, particularly immunoglobin products. Plasma is the substance that carries red and white blood cells through the body – these therapies are relevant for disorders such as hemophilia, primary immune deficiencies, hereditary angioedema and inherited respiratory disease.

Despite its size, CSL continues to spend hundreds of millions of dollars on R&D annually and is not hesitant to undertake M&A activity. Recently it made the biggest buyout in its history: Switzerland’s Vifor Pharma for which it paid US$11.7bn late in 2021. CSL is evidently looking to profit from kidney disease, which affects 850m people globally – a figure expected to grow given the global obesity epidemic. Additionally, the firm has steady leadership with the company now onto only its third CEO since listing.

 

Current worries

Investors in CSL have 3 worries on their mind: Vifor, Ozempic and margins. Let’s deal with each of these.

 

Vifor

Vifor is a Swiss renal therapy and iron deficiency products company that CSL paid US$11.7bn for in late November 2021. Investors doubted whether or not it paid the right price, especially as the company was opaque about the acquisition for some months – only giving a detailed overview in October 2022.

CSL wanted to expand its R&D pipeline and gain exposure to the growing market that Vifor’s products serviced. The key product was Ferinject which contributed more than a third of revenue, but came off patent in Europe in 2023 and in the US in 2028. Investors felt somewhat vindicated by their scepticism when CEO Paul McKenzie warned investors in its 1HY24 results that the portfolio faced headwinds. Some late-stage assets had poor showings in the clinic, and step-edit measures in the US requiring patients to try cheaper drugs before ‘stepping up’ to more expensive alternative were taking a toll. Vifor contributed US$1bn in sales, although this was barely one-eighth of the company’s total revenues. CSL’s Behring business (the blood plasma division) recorded $5.2bn in revenue.

 

Ozempic

Investors believe that if you can aid weight loss and rescue obesity – and the data overwhelmingly depicts that the drug can – you can reduce the risk for many health conditions caused by obesity such as heart disease. In doing so, you eliminate the market for many medtech and biotech companies.

In our view we think the potential impact has been overblown for 5 reasons. First, because Ozempic does not aid those already suffering from conditions. Second, there have been severe supply chain issues for Ozempic since it has taken off in popularity. Third, the broader weight-loss drug market may become too fragmented for Ozempic to have an impact. Fourth, it remains to be seen what regulators could do to the drug’s market. Keep in mind that Ozempic is still not approved for obesity. Also, there have been some minor interventions by other regulators, such as reducing subsidiaries and instructing doctors to prioritise alternatives non-diabetics. And fifth, it could pose an opportunity for healthcare stocks with manufacturing facilities to manufacture the drug themselves.

 

Margins

Third, margins have been under pressure. Yes, this has been true with many companies, but not as much with CSL – a fact that has worsened the hit to the company than otherwise would be the case. Margins are suffering given foreign currency headwinds, higher costs it had to pay to collect plasma as well as increased competition in the iron deficiency market – which it entered after acquiring Vifor. In June 2023, it told investors its post-tax profit could come in up to US$600m lower than consensus estimates – an announcement that led to a large intraday fall.

 

Double digit growth for the rest of the decade

CSL just released its FY24 results. It delivered US$14.8bn in revenue and a $2.9bn post-tax profit, both up 11% from FY23. It paid a total dividend of US$2.64 per share, or A$4. The biggest contributor was the Behring segment which delivered US$10.6bn in sales, $5.7bn of which came from its Immunogobulin products including Privigen and Hizentra.

The company anticipates its profit to be $3.2-3.3bn for FY25 and for revenues to be 5-7% higher. CEO Paul McKenzie proclaimed the company was in a strong position to deliver annualised double-digit earnings growth.

Nonetheless, investors were nuanced to the result because the jury is still out on Vifor, and because market conditions for the blood plasma business were admitted to be difficult in the short-term. The company has to pay for blood plasma donations and has had to pay higher donor fees. Donor fees may have peaked, but are unlikely to return to pre-COVID levels. The company has told investors it is seeking to use digital technology and more flexible labour to more effectively manage donors.

 

So should I buy CSL?

Analysts covering CSL have a mean price of A$317.62, a figure 7% higher than the current share price. They call for $15.8bn in revenue and $6.75 EPS for FY25 (or a $3.27bn profit) which would be in line with the company’s expectations. For FY26, $17bn in revenue (up 7.6%) and $7.81 EPS or a $3.8bn profit (up 16%). The company is trading at 7x EV/Sales, 20.3x EV/EBITDA, 29.2x P/E and 2.1x PEG – all hefty multiples for an ASX company.

We think investors who hold for 10-20 years won’t be disappointed in buying CSL now. However, it won’t generate ‘quick’ returns, so those investors shouldn’t buy CSL. One forthcoming catalyst may be sales from HEMGENIX, the first ever FDA-approved gene therapy for hemophilia B, that is one of the world’s most expensive drugs, costing US$3.5m. Although a new drug won’t be as much of a catalyst for a share price spike than it would be with a clinical stage biotech with just one or two assets.

But whether you own CSL or not, you’ll hear a lot about it because it is such a prominent company.

 

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