CSL hosted a site tour at its facilities in Europe, where the company reminded investors that its capex underpins the best-in-class manufacturing facilities, building its competitive advantage and moat. Smaller fractionators have experienced difficulty in expanding production plants, with major fractionators consistently spending to lift the benchmark for quality and safety.
Plasma collection has recovered to >10% vs pre-Covid levels, with ~24m litres of base fractionation capacity. The collections however are still ~3years behind the original planning projections. The manufacturing capacity and collection fleet remain ~30% underutilised in CY23, resulting in capex falling ~20% from recent peaks. Therefore, we see a short-term capex holiday as CSL focusses on maximising the potential of its current assets. If CSL can execute on its margin recovery, growth can remain elevated for 3-5 years.
Margin expansion through a reduction in donor fees now has some evidence, with peers starting to remove bonuses for new and return donors. There is also increasing evidence that the US/Mexico border reopening is showing a recovery in collections, with CSL’s ~6 centres within walking distance of the border representing 3-5% of CSL’s total US collections.
Vifor’s ‘home of iron’ site in Switzerland demonstrated its manufacturing expertise of its ‘iron replacement’ business through its key injectable products Ferinject/Injectafer, Venofer and Maltofer tablets. Whilst these drugs are set to be exposed to generic equivalents (Injectafer in 2026), CSL demonstrated the manufacturing complexity involved, which should ultimately limit the number of competitors. This includes the limited global availability of the starting material at the required grade, creating barriers to generic entry.
The growth strategy is driven by geographic expansions with current production capacity of 1,000 tons per year set to increase 50% with new expansion on the same production site. Recent and upcoming Dialysis/ Nephrology launches should also be a growth opportunity. CSL are also confident on the imminent US Heart Failure label, which currently represents ~20% of Injectafer sales in Europe, and therefore a significant growth opportunity in the US.
Tour Summary
Whilst the tour did not provide any new material information, the reaffirming of the significant manufacturing capabilities, competitive advantages and the recovery in plasma collections and margins have provided us more confidence in the outlook.
Investment View
CSL is expected to continue to grow EPS in the high teens over the next 2-3 years, driven by plasma collection recoveries, improving margins and potential synergies from the Vifor acquisition. Earnings revisions year to date have been largely positive as the market begins to appreciate the opportunity. FY23 guidance looks conservative in our view, and if CSL can execute on margin recovery, EPS growth can remain elevated for 3-5 years.
Risks to Investment View
The Vifor acquisition is now complete and its integration with CSL is underway. Progress on this will reveal any challenges or changes to views of the benefits and costs. Global blood products markets have been impacted (plasma collections) and this may also present challenges if further variants emerge causing disruptions. Regulatory approvals of new products also remain a risk to future growth prospects.
Recommendation
We have retained our Buy recommendation.
Figure 1: 3-month rolling EPS revisions driven higher in 2023 by plasma collection volume recovery and margin expansion
