CSL Limited (ASX: CSL) has been around since World War 1. They are one of the biggest stocks on the ASX that researches, develops, manufactures, markets, and distributes biopharmaceutical and allied products in Australia, the United States, Germany, the United Kingdom, Switzerland, China, and several other parts of the world. The company operates through two segments – CSL Behring and Seqirus.
There are 3 parts to CSL’s story and why it is one of the largest healthcare stocks in the world – its essential products and services, its geographical diversification, and its constant R&D investments that continue to deliver additional products.
These 3 properties have created a snowball effect, constantly pushing the company to get bigger. The CSL share price also evidences this over the past 10 years. CSL has outperformed the broader index consistently, and when we look at the past 5 years, CSL has delivered 111%, while the ASX 200 has returned 24%.
While past performance is no guarantee of future performance, it does offer reassurance that the company is on top of its game and has consistently beaten the market. CSL applies its world-class R&D, commercial strength and patient-focused management, and high-quality manufacturing to develop and deliver innovative biotherapies, influenza vaccines and support programs.
CSL is a global leader in developing and delivering high-quality medicines that treat people with rare and serious diseases. Their treatments offer promise for people living with conditions in the immunology, haematology, cardiovascular and metabolic, respiratory, and transplant therapeutic areas. CSL Behring drives more than 80% of overall company revenue with markets in more than 100 countries across the Asia Pacific, Europe, Latin America and North America.
Behring’s therapeutic areas are:
Immunology – The world’s leading immunoglobulin franchise is the cornerstone of the therapeutic immunology area. Key CSL products in the market include PRIVIGEN, HIZENTRA, BERINERT, HAEGARDA and a range of Hyperimmunes.
Haematology – CSL is focused on maximising the value and performance of their existing coagulation portfolio, developing new therapies, and identifying transformational treatments to increase the quality of life and help patients realise a life full of potential. Key CSL products in the market include IDELVION, AFSTYLA, HUMATE P/HAEMATE P, BERIPLEX/KCENTRA, VONCENTO/BIOSTATE and Albumin.
Cardiovascular and Metabolic – CSL is focused on improving and extending the lives of patients with cardiovascular disease (CVD) and diabetes.
Respiratory – These diseases impose an enormous burden on patients and society and are a leading cause of death and disability worldwide. Key CSL products in the market include ZEMAIRA/RESPREEZA.
Transplant – While advances in transplantation techniques and therapies have markedly improved short-term patient survival, transplant rejection remains one of the greatest limitations to long-term graft and patient survival for solid organ and haematopoietic stem cell transplant recipients.
As a leading influenza vaccine provider globally, Seqirus is a major contributor to the prevention of influenza globally and a transcontinental partner in pandemic preparedness. Seqirus operates state-of-the-art production facilities in the United States (US), the United Kingdom (UK) and Australia and utilises both egg-based and cell-based manufacturing technologies and a proprietary adjuvant. It has leading research and development (R&D) capabilities, a broad and differentiated product portfolio and commercial operations in more than 20 countries.
Influenza Vaccines – Egg-based and cell-based products, seasonal, pre-pandemic and pandemic influenza vaccines.
Products of National Significance – Q fever vaccine and antivenoms for venomous creatures in Australia and other Pacific countries.
In-licensed Vaccines and Pharmaceuticals – For Australia and New Zealand.
Both these segments that CSL leads the market in are essential to the healthcare system. The firm holds a commanding position amongst competitors, and given the critical nature of the operations, CSL should perform well during periods of high inflation and geopolitical tensions.
CSL dedicates about 10%-11% of its revenues to the R&D pipeline. This is extremely critical for any product-based healthcare company. The company needs to be able to innovate and come up with new products.
CSL’s world-class R&D organisation continues to evolve as a biotechnology leader by advancing high-quality science and technology through its high-calibre scientists and innovative collaborations. R&D utilises its expertise in four strategic platforms – plasma fractionation; recombinant protein technology; cell and gene therapy; and cell-based and egg-based vaccines.
This ensures that CSL can develop and deliver innovative medicines and vaccines that address unmet medical needs, help prevent infectious diseases, protect public health, and help patients lead full lives. CSL’s strong R&D pipeline includes new treatments that utilise these platforms and align with its leading-edge scientific technology and commercial capabilities across our six therapeutic areas: immunology; haematology; cardiovascular and metabolic; respiratory; transplant; and influenza.
In 2020/21, CSL invested US$1 billion in R&D across its businesses, which is around 10-11% of CSL’s annual revenue. Looking towards 2030, R&D continues to strive to deliver on the current portfolio of medicines and vaccines and build a full and innovative pipeline that will make a meaningful difference in treating serious diseases. This pipeline will also assist with planning future revenue well into the following decades.
With over 900 active product registrations in over 100 countries, CSL continues to deliver on its novel therapies available to patients worldwide. The firm’s commercial team continues to execute on product, therapeutic area and regional product strategies. While remaining agile to work through the COVID-19 pandemic, CSL continues to support demand across its portfolio of therapy areas, with balanced regional and market growth. The Commercial Operations Leadership Team oversees the delivery of CSL’s marketplace strategy, and the CSL Board has strategic oversight and monitors performance through key subcommittees.
The decision to enter new markets is a long-term commitment driven by a desire to understand and respond to patients’ needs. While CSL invests locally to improve disease awareness and access to medicines, the firm also brings global benefits to its markets.
Global reach and focus
In the past five years, CSL has grown rapidly due to strategic acquisitions, rising global demand for its products, and increased capacity and modernisation investment. CSL’s management team has significant experience in the industry and the confidence to drive growth. The commitment to strategic sourcing has allowed CSL to have a reliable supply of lifesaving therapies in multiple facilities across the globe. Several CSL sites support major capacity expansion projects, from Project Phoenix for base fractionation in Marburg, Germany, to Project Protinus for PRIVIGEN in Bern, Switzerland and Project Aurora for base fractionation in Broadmeadows, Australia. The timing of these projects coming online will help ensure a seamless supply of products to patients.
A division of CSL Behring, CSL Plasma collects the plasma that is the foundation for manufacturing plasma-protein therapies – human plasma donated across one of the largest global plasma collection networks. CSL Plasma has more than 300 collection centres worldwide, primarily in the US, Germany, Hungary and China. CSL Plasma operates plasma testing laboratories and logistics centres in the US, Germany and China. In addition, a US manufacturing facility produces saline and sodium citrate, both essential solutions to the plasma donation process. CSL Plasma continues to invest in new collection centre growth and laboratory and logistics operations to automate and expand testing and storage capacities.
CSL continues to strengthen and grow the CSL Plasma footprint to support a safe and reliable plasma supply to meet increasing patient demand. A quality supply of raw material results from safe, compliant and efficient plasma collection and donor management. Surveys completed by CSL Plasma donors indicated 99% would be willing to donate again, and 97% would be willing to refer a friend to donate.
Now that we know the most important pillars that makeup CSL, let’s have a look at what is brewing within CSL and how it is shaping up for growth.
CSL encountered a few headwinds during the pandemic as they could not collect the plasma required for their Behring segment to perform. However, since the latter half of 2021, CSL’s plasma collection numbers have recovered. The factors driving the growth here are:
- Competitive donor fees
- Improved social mobility within the COVID environment
- Enhanced operating and marketing initiatives bringing back lapsed and attracting new donors
- Enhanced donor experience through increased use of technology
- Collaborating with industry bodies to promote plasma donation
In the first half of FY22, Plasma Collection volumes were up 18%. CSL opened 18 new centres and has planned to open 35 new plasma collection centres – effectively capitalising on the growth trend.
R&D has also been going strong during the first half of FY22. Partnerships and Alliances bring smart minds together and have proven that it is a good strategy. Staying true to this, CSL, WEHI, & the University of Melbourne secured State Government funding to create a biotech start-up incubator in CSL’s new global headquarters, under construction, in Melbourne.
In Melbourne, a new HQ and R&D facilities are under construction and on track for completion in early 2023. In Marburg, a new seven-storey R&D Campus to house 500 researchers will open in 2022. A new Seqirus facility in Waltham will be operational in 2022, which will host approximately 300 employees supporting CSL’s R&D portfolio, including the sa-mRNA technology platform.
Vifor Pharma Acquisition
This is one of the most important deals for CSL and one of the most important parts of its growth story. It enables CSL to access the very large Renal market – valued at US$25 billion.
In December, CSL announced that they that they will be acquiring 100% of Vifor Pharma for US$179.25 per Vifor Pharma share, representing a 40% premium to the unaffected 60 trading day volume-weighted average price of Vifor Pharma shares as of 1 December 20217. The Tender Offer represents an aggregate equity value for Vifor Pharma of US$11.7 billion or A$17 billion.
The transaction, which has been unanimously approved by both company’s boards of directors, further advances CSL’s 2030 strategy to create value by adding a high growth, cash generative and sustainable business that complements and expands the global leadership positions CSL Behring and Seqirus.
Strengthens CSL’s Value-Driven Strategy
- Vifor Pharma adds a durable and growing business with leadership positions across complementary and adjacent franchises, delivering greater benefit to CSL.
- The transaction expands CSL’s portfolio breadth with the addition of 7 commercialised products, including Ferinject / Injectafer, Venofer, and Veltassa, adding leadership positions across multiple franchises.
- The combined company will have an expanded pipeline of 37 products across development phases, representing an increase of 32% from CSL’s current standalone pipeline, with up to four product launches expected in 2022 / 23.
Builds a Significant Renal Franchise
- Vifor Pharma is a “partner of choice” for innovation in nephrology due to its synergistic joint venture with Fresenius Medical Care, the global leader in dialysis, combined with Vifor Pharma’s clinical and commercial expertise.
- Vifor Pharma has announced the acquisition of two companies and formed more than a dozen business development partnerships spanning multiple assets and geographies over the last six years, strengthening and deepening its product portfolio and innovation pipeline.
- The nephrology market is experiencing rapid growth to over US$25 billion estimated relevant market in 2026 and significant pipeline opportunities driven by an aging population and increased prevalence of chronic kidney disease risk factors such as diabetes and heart disease.
- Renal disease represents an enormous growth opportunity. Chronic Kidney Disease (CKD) has increased steadily over the past decade, with a high single-digit annual growth rate, largely driven by diabetes and high blood pressure.
Extends the Reach of CSL’s High-Value Pipeline
- Complementary portfolio across CSL’s existing therapeutic focus areas, including Haematology and Thrombosis, Cardiovascular-Metabolic, and Transplant.
- Vifor Pharma also provides access to logical new adjacencies across Renal Disease and Iron Deficiency with strong market positions and growth opportunities in each area.
- Recently approved drugs – Tavneos and Korsuva – offer significant commercial momentum across these new adjacent focus areas.
Materially Enhances Scale and Free Cash Flow
- Revenue and cash flow accretive business remains geographically diversified, improving financial resilience and durability.
- CSL’s global reach, R&D capabilities and resources enable Vifor Pharma to accelerate growth in Cardiovascular-Metabolic, Renal and Transplant. In addition, US$75 million run-rate pre-tax cost synergies are expected, phased in over three years post-acquisition close.
Compelling Financial Profile
- Expected to be low-to-mid teens NPATA per share accretive in the first full year of CSL ownership, including full run-rate cost synergies.
- CSL’s balance sheet strength will be retained with pro forma FY21 net debt / EBITDA of approximately 2.65x and a clear de-leveraging profile, maintaining flexibility to support the continued execution of R&D and business development projects.
Following the completion of the acquisition, the above chart shows how CSL’s revenues will look. About 16% will be driven by Vifor Pharma – which is greater than the Seqirus segment. The investment thus ticks several boxes for CSL, and as of an update earlier this month, the regulatory approval is being delayed by a few more months. We believe that the cash flows from this acquisition have not yet been fully priced into the CSL stock and therefore – creating an undervalued opportunity.
For the first half of FY22, we saw CSL deliver a positive result. While the market was under the notion that their Plasma collection volumes were still some time away from recovery, CSL showed that the recovery is well underway as the severity of the pandemic subsided not just in the USA but globally.
CSL delivered a net profit after tax of $1.76 billion for the first half of the financial year 2022, down 5% at constant currency, with revenue up 4% at constant currency. The financial performance was in line with expectations. There was strong growth in market-leading haemophilia B product IDELVION and across specialty products KCENTRA and HAEGARDA.
Ig and albumin sales were limited by constrained plasma collections in FY21. However, overall, CSL has responded well by implementing multiple initiatives in their plasma collections network, which has given rise to significant improvement in plasma volumes collected.
Given the long-term nature of CSL’s manufacturing cycle, this will underpin stronger Ig and albumin sales in the future.
HPV royalties rebounded strongly, and there was a strong performance by the influenza vaccines business, Seqirus.
CSL reported Earnings per share of $3.77, down 5% at constant currency and declared an interim dividend of US$1.04 per share. Converted to Australian currency, the interim dividend was approximately A$1.46 per share, up 8%.
Net profit after tax for FY22 is anticipated to be in the range of approximately $2.15 billion to $2.25 billion at constant currency.
Capital RaiseD to Support Growth
CSL undertook a fully underwritten institutional placement of new fully paid ordinary shares in CSL to eligible institutional investors to raise approximately A$6.3 billion (US$4.5 billion). The Placement price was A$273 per share. CSL also completed a Share Purchase Plan in February and raised A$750 million.
To fund the all-important Vifor Pharma acquisition, CSL undertook a capital raising. The A$17 billion deal is being funded by:
- A fully underwritten institutional placement of A$6.3 billion (US$4.5 billion);
- A fully committed debt bridge facility of US$6.0 billion / A$8.4 billion; and
- Existing cash / undrawn facilities of US$2.0 billion / A$2.8 billion.
In April, CSL undertook and completed a US$4 billion debt raise. The company announced that the bonds are split into six $US500 million and $US1 billion chunks. The $US4 billion is the largest single-currency debt capital markets transaction from an Australian or New Zealand corporation, according to a note from Citi – one of the investment banks working on the deal.
CSL’s first debt tranche comes with a five-year fixed coupon of 3.85%, and the sixth $US500 million tranche comes with a 40-year coupon of 4.95%.
Following Vifor’s integration, CSL will have a robust portfolio of therapies for iron deficiency conditions and kidney diseases and its core plasma-based products for immunodeficiency diseases.
The bond demand was so substantial that the order book peaked at $23 billion – a figure Citi said was the largest order book ever for an Aussie corporate debt transaction. Reports also emerged that CSL had the propensity to extend the size of the debt raise but opted to cap it at $US4 billion.
While debt issuance is usually not a good sign during interest rate hikes, this raise by CSL is different. Firstly, it’s a fixed interest rate corporate bond, and CSL, with all its revenues and cash flows, is regarded as an extremely bond issuer.
CSL’s outlook is all about its 2030 strategy. The strategy was developed to maximise CSL’s capabilities and advantages in a competitive and changing world. Historically and to this day, CSL has had the most efficient supply chain from collections to finished products for plasma-derived protein therapeutics. This business has grown sustainably in recent years. The firm’s differentiated cell-based influenza products offer communities improved protection against seasonal influenza.
Plasma collections have been adversely impacted over the last year. We expect CSL to return to a growth trajectory in 2022. Demand for influenza vaccine products has never been higher. CSL delivered a record number of doses worldwide last year amid heightened vigilance due to COVID. We expect this to continue in the coming years as the awareness of the burden of infectious disease grows.
As a part of the 2030 strategy, CSL is investing heavily in innovation to further boost its market dominance in the areas they operate in. Additionally, CSL is looking to enter new markets with new products and through acquisitions, as seen in the Vifor Pharma acquisition.
As Plasma collections have already started to improve, especially in the USA – CSL’s largest Plasma collection market, costs should decrease as collections and volumes start to normalise.
For FY22, revenues and earnings are estimated to be marginally boosted compared to FY21. As the pick up in volumes and core business performance improves, we expect CSL to kick on in terms of revenues and earnings. The Vifor Pharma acquisition and the improved organic growth will see CSL’s revenues push past the $15 billion mark in FY25 and beyond.
CSL’s net profit after tax for FY22 is anticipated to be in the range of approximately $2.15 billion to $2.25 billion at constant currency. This includes approximately $90 million to $110 million in transaction costs related to the agreement to acquire Vifor Pharma. We expect Net Income to surge close to the $4 billion mark in FY24. We believe that this is not yet priced into the current stock price. On the whole, our analysis points toward 3 reasons why CSL is undervalued:
- The overall underperformance of the entire Healthcare sector,
- Benefits from CSL’s Vifor Pharma acquisition have not been fully priced into the stock price, and
- CSL’s business is expanding and now emerging from the effect the pandemic has had on its organic growth. Yet the stock is trading cheaper than it has in recent years.
CSL’s Plasma collection volumes have started to rebound, and organic growth has begun its recovery. This means that costs will start to come down as volumes pick up. Their influenza vaccine business is performing stronger than ever and is expected to expand in a world where infectious diseases are taken far more seriously. The Vifor Pharma deal is significant and instantly makes up about 16% of CSL’s revenues. The fundamentals of it are yet to be fully priced in. In an inflationary environment, CSL is a near-perfect company with characteristics such as Brand Value, Pricing Power, and Essential Products. CSL thus ticks several boxes, and we recommend long-term investors to “Buy“.