CSL Limited (OTCPK:CSLLY) Q4 2022 Earnings Conference Call August 16, 2022 9:00 PM ET
Company Participants
Mark Dehring – Head, Investor Relations
Paul Perreault – Chief Executive Officer
Joy Linton – Chief Financial Officer
Paul McKenzie – Chief Operating Officer
Conference Call Participants
Andrew Goodsall – MST Marquee
Saul Hadassin – Barrenjoey
David Low – JPMorgan
Chris Cooper – Goldman Sachs
Sean Laaman – Morgan Stanley
Gretel Janu – Credit Suisse
Steve Wheen – Jarden
David Bailey – Macquarie
David Stanton – Jefferies
Craig Wong-Pan – Royal Bank of Canada
John Deakin-Bell – Citi
Lyanne Harrison – Bank of America
Operator
Thank you for standing by and welcome to the CSL Limited Full Year Financial Results Conference Call. [Operator Instructions] I’d now like to hand the conference over to Mr. Mark Dehring, Head of Investor Relations. Please go ahead.
Mark Dehring
Good. Thank you, operator and good morning everyone and welcome. I have with me here in the room, Paul Perreault, CSL’s Chief Executive Officer; Joy Linton, CSL’s Chief Financial Officer; and Paul McKenzie, CSL’s Chief Operating Officer. As with past practice, Paul will provide an overview of the results and operations and then Joy will provide some additional details on the financials. And we will then move to Q&A. In doing that and with a view to giving everyone an opportunity to ask question, could you please limit your questions to two. If you do have further questions, you are of course welcome to rejoin the queue. Please note this briefing is being webcast.
And lastly, before we start, I draw your attention to the forward statement disclaimer contained in the slide deck. I will now pass you over to Paul Perreault. Paul?
Paul Perreault
Thank you, Mark and good morning everyone and thank you for joining the call today. Before I move into the results, I want to make a few comments on a very contemporary topic, our acquisition of Vifor Pharma.
Look, it’s a very exciting time for us. The ink is still wet on signing the virtual check. And already, we are in full swing of engaging with our new colleagues and starting the integration process. So what does this mean for CSL’s shareholders? Early data indicates no change to our overall view of the financial contribution from the acquisition of Vifor Pharma Ltd. It remains a really good deal for CSL. In fact, it’s quite unusual how often you come across a biotech that’s actually generating cash flows as well as having an exciting future for growth opportunities. We now have an amazing franchise encompassing renal disease and diseases of iron deficiency. All this and our balance sheet remains solid. In fact, it’s in really good shape.
We received strong support from both debt and equity investors in raising $11 billion, showing extreme confidence in the transaction. We have now paid for the acquisition, which incidentally Vifor came with $0.5 billion of its own cash. And we have kept our A credit ratings, the takeout being we are now a significantly larger company, have a broader strategic horizon and at the same time, we have retained our financial flexibility. I could go on, but we will be talking more about the strategic merits of the deal at a dedicated CSL Vifor briefing in October and I hope all of you can make it.
So, now turning to the results. CSL has delivered a good result at the top end of our guidance in a very challenging global COVID environment. And before I get into the detail, it would probably be remiss of me not to call out our 27,000 CSL employees. Over the last few years, since the emergence of COVID, our employees have displayed enormous resilience with an unwavering commitment to deliver on our promise to patients and the protection of public health around the world. We continue to invest in the business and remain focused on executing on our 2030 strategy and I couldn’t be any prouder of the CSL team than what I am today.
So moving to the performance slide. Revenue was up 3% at constant currency and net profit after-tax came in at $2.25 billion, at the top end of our financial guidance provided at the half year result. In the CSL Behring business, our sales of immunoglobulin and albumin, the two major products we extract from every liter of plasma, have been constrained by the volume of plasma collected in the previous year, remembering that plasma products have a long manufacturing cycle between 9 and 12 months.
A constant topic since the emergence of COVID has been the growth rate of plasma collections. I am pleased to say that plasma collections have grown strongly, up 24% over the previous year, which we anticipate will underpin strong sales growth this current financial year and we aim to continue this momentum into the future. Supply chain challenges, inflationary pressures and higher plasma collection costs have all contributed to margin compression throughout fiscal ‘22.
Over the last few years, I have really commended CSL Seqirus on delivering a set of impressive results and fiscal year ‘22 is very much the same. We continued to execute on the innovation and strategy that we set forth for CSL Seqirus. We will continue to drive sustainable growth across the enterprise in fiscal year ‘23 and beyond and R&D is a major component of that. As such, we continue to invest in programs that will deliver both mid to long-term growth.
And we formally, as I mentioned earlier, welcome Vifor now CSL Vifor to the CSL Group. We are not in a position, as I said, to discuss this today. However, CSL Vifor market briefing is scheduled for Monday, October 17, when investors will have an opportunity to hear from CSL Vifor management team as well as CSL execs as we discuss CSL Vifor’s growth strategy insights into its product portfolio and some of the key value drivers.
So, for CSL Behring, a very strong performance from IDELVION, our market-leading hemophilia B product, which was up 20%, this does remain the standard of care in all major markets where we have launched IDELVION. Our major specialty products continue to experience growth with KCENTRA up 18% and HAEGARDA up 5%. HPV royalty revenue exceeded pre-pandemic levels and was up 55% year-on-year. Our core franchise of immunoglobulins declined 3%, a reflection of the lower plasma volumes collected last financial year.
Continued investment in our plasma collection supported by digital enhancements and marketing initiatives and we saw plasma collections, as I just mentioned, grow. Our new plasmapheresis platform was approved during the year and is being rolled out during fiscal year ‘23. And today, I am also pleased to announce, you may have seen a press release, on the receipt of positive top line data for garadacimab for the treatment of hereditary angioedema, very exciting progress for us on that Phase 3 trial.
And for CSL Seqirus, our influenza vaccines business has delivered another exceptional performance. U.S. sales exceeded $1 billion for the first time with seasonal influenza vaccine sales up 16%. This was primarily driven by exceptional growth in FLUAD, which was up 41%. CSL Seqirus distributed a record number of 135 million doses of influenza vaccine during the year. And to support this growth, we continued to invest in process innovation and our manufacturing facilities and also with fill and finish capacity projects having been completed at both Holly Springs and Liverpool.
Turning to Slide 5 in CSL Behring sales by therapeutic area. Overall, the Behring revenue was up 2% at constant currency. Ig, our core franchise, declined 3%. Albumin was down 1%. Hemophilia was up 8% and specialty products were up 3%, including strong performances, as I mentioned, by KCENTRA and HAEGARDA. The 37% growth in other largely reflects HPV royalties and the contribution from COVID vaccines. Of note, we have now completed the manufacture of 50 million COVID vaccine doses for the Australian government and these contributions will not repeat in fiscal year ‘23.
In terms of the geographic split of CSL Behring revenue, North America continues to be our largest market accounting for 49% of total CSL Behring revenue, up 1%. Our next biggest market, Europe, declined 5% in revenue. And this is where we really felt the impact of Ig supply tightness. Asia-Pacific was up 21%, primarily as a result of the strong albumin demand in China.
Moving on to Slide 6 in immunoglobulins. As I mentioned earlier, sales have been constrained by plasma collected last year and supply is the core limiting factor. We are optimistic that we are seeing improved momentum evidenced by a strong second half performance in Ig. Our product HIZENTRA remains the clear leader in the subcu market with approximately 60% market share in the U.S. Supporting HIZENTRA growth has been the demand for CIDP treatment following an update to the Peripheral Nerve Society Treatment guidelines as well as Medicare Part B reimbursement approval.
The guidelines recommend subcutaneous for the maintenance treatment in CIDP and enhanced label dosing and long-term efficacy information from the PATH extension data update. And most importantly, HIZENTRA will now offer an improved patient experience with faster and easier administration option of a pre-filled syringe. Patients want the convenience of home-based treatment, an offering that HIZENTRA has been the leader in and is able to provide.
I will say COVID has presented challenges for patients. They have had limited access to treatment and diagnosis. There has also been an environment of constrained supply. However, as the global supply recovers, we are anticipating a strong growth rebound in the Ig portfolio, with opportunities in core indications of primary immune deficiency, secondary immune deficiency and CIDP.
Turning to Slide 7 in albumin where sales were down 1% despite the increased competition in China. We have maintained our market leadership position with sales up 10%. The change in our operating model in China is paying off. The 10% growth comes from being able to extract greater effectiveness from having increased channel transparency and greater reach to hospitals and healthcare providers. Having said that, China remains a competitive market as our competitors increase their investments in China. Looking forward, we anticipate volume demand to continue to grow at mid to high single-digits. However, pricing pressures may continue due to the increased supply from importers.
Outside of China, it has been a bit more challenging. Volume declined in Europe and emerging markets following increased competition from local manufacturers who have access to some local plasma sources. In the U.S., volume also declined as supply constraints continue the direct effect of the lower plasma collections in the previous financial year. More broadly, across the markets, clinicians are using albumin and preference to other colloids as well as increased usage of albumin in sepsis and liver patients.
Now to hemophilia on Slide 8, where we start to talk a little bit about CSL products not impacted by plasma collections, with sales up 8%. IDELVION was a standout performer, up 20%. It is the clear market leader for heme B patients, with a compelling clinical profile that continues to drive patient demand and market share. IDELVION does remain the number one Factor IX prophylactic product in markets where we have launched with the highest patient shares in major European countries. We continue to explore further opportunities with IDELVION having completed an extension study, which evaluated patients for up to 4 years, confirming the long-term efficacy and safety profile of IDELVION. We have also gained 21-day dosing approval in EU, Switzerland, Japan and Canada and have seen strong uptake in France since we launched with approximately 30% patient share.
AFSTYLA declined 4% primarily driven by the continued competitive market pressures in the heme A market. Despite the challenges, we have made some good gains in key markets. Competitive market pressures have also negatively impacted on our plasma-derived hemophilia products. This was offset to some extent by heme A growth in the United States. Overall, we are seeing ongoing movements towards new generation products within the hemophilia space and expect this trend to continue going forward. Etranacogene is one such example.
On to Slide 9 in Specialty Products, which nearly tripled over the last decade to $1.8 billion, now our second largest therapeutic group. HAEGARDA, our transformational therapy for treating patients with hereditary angioedema, or HAE, continues to perform strongly and up 5%. Recent launches in EU and Australia have exceeded our expectations, with Europe recording 60% growth and market share in the Australian prophylaxis segment quickly surpassing competitors to gain 70%. We continue to add new patients despite increased competition as the treatment paradigm further shifts from on-demand to long-term prophylaxis. In the U.S., HAEGARDA continues to have the largest share of on-demand prophylaxis switches and remains the only therapy indicated for patients 6 years of age and older and with special populations data such as pregnancy now contained in the label.
BERINERT was down 6%, primarily reflecting patients shifting to HAEGARDA. And KCENTRA, commonly known as the gold standard for warfarin reversal, was up 18%. In the U.S., where the bulk of the sales originate, KCENTRA has grown significantly since launch, driven by both penetration within existing large hospitals and expansion into smaller regional accounts. The small volume and fast infusion profile appeals to the target market. And lastly, Alpha-1 sales were down 17% following the supply interruptions at Kankakee. We have now resolved these issues and have provided consistent supply to the channel over the last 6 months, with commercial now focusing all of their efforts on regaining ZEMAIRA users.
Just a comment on Specialty Products. Some years ago, we indicated a target of $800 million to $1 billion for this category and we have now reached $1.8 billion of sales, illustrating the benefit when you have a differentiated product portfolio.
Turning to Slide 10 and plasma collections. As has been well documented, COVID has presented the plasma industry with many challenges and plasma collections is one such area of our business that has been greatly impacted by the pandemic. A return to growth just doesn’t happen via one response effort, it requires a team that’s in sync, driving and executing multiple innovative measures.
The CSL Plasma team has worked tirelessly and have implemented a number of targeted initiatives with a core focus on growing plasma collections. The team’s resilience and dedication has been outstanding and we have seen a volume improvement of 24% from fiscal year ‘21 to fiscal year ‘22.
The following slide graphically illustrates this performance. But before we get there, I’d like to share some of the initiatives we have undertaken to support collections growth. We have enhanced our operating and marketing efforts to attract new donors, but also lapsed donors both of which are an important source of future donations. For example, our revamped brand positioning and advertising via the Do The Amazing campaign has been delivering compelling brand positioning, surpassing industry benchmarks and ultimately driving new applicant donor prospects and importantly, raising brand awareness. The donor app-enabled digital marketing initiative has reached approximately 2 million people and is one of the key levers for the increased level of donations leading to collections now exceeding pre-pandemic weekly average run-rates. Self-serve initiatives and the ability for donors to register online are other components of our digital offering, all of which are dedicated to ensuring a best-in-class donor experience.
Our investment continued in opening new plasma collection centers with 27 new plasma collection centers opened last year. Not only have we invested in increasing the size of our network, but as many of you already know, we have made investments in the new plasmapheresis platform being rolled out during the fiscal year 2023. This platform will improve the donor experience by reducing average donation time by more than 30%, improve donor safety and comfort by reducing the amount of blood outside the donor body at any one time. It delivers material sustainable benefits, specifically waste management with a significant reduction in one-time use of plastics. It improves the employee experience with ease of use in advanced diagnostics for maintenance and operation. More broadly, across the industry as donor fees have increased, we have redesigned donor fee structures and that has assisted us in capturing more new donors and help retain those donors.
We continue to gain momentum. However, there are some industry-wide issues that remain. The pandemic is ongoing. New variants continue to emerge. Staffing centers to remain open and to operate at optimal levels is a challenge for the industry. As you would know, there are labor shortages in many countries, including Australia. The U.S. employment environment is very competitive. And whilst we have introduced retention schemes to enhance compensation for staff, attracting and retaining employees remains a challenge in this space.
Turning to the next slide, the donors per week graphic, which is a good proxy for liters collected. The red line is calendar year ‘22, gray ‘21 and black ‘20. You can clearly see the improvement on prior period, which was plus 24% overall. And as I mentioned before, the plasma team have left no stone unturned when evaluating and executing initiatives to grow plasma volumes. The growth has been extremely positive and gives us confidence about sales growth in fiscal year ‘23.
I’d like now to bring the key elements underlying our outlook for CSL Behring together. Fundamentally, the business is well-positioned for growth post-COVID with more collection capacity, more manufacturing capacity and good demand indicators. With regards to increasing collection volumes, through the continued investment, CSL Plasma has opened 73 new centers since the beginning of the pandemic, that’s more than a 30% increase. As some state and local county executive orders were rescinded in mid-‘21, plasma collection centers are progressively now returning to pre-pandemic operational design.
Of the 10% of beds that we temporarily removed during COVID to meet social distancing requirements, 5% of the beds are still to be returned to the center. So, there is latent capacity available to have more donors in the center. Our new plasmapheresis platform brings with it a number of benefits, including a more than 30% reduction in average donation time and that means faster bed turns, lower staff to donor ratios, fewer new centers needing to be opened.
With regards to manufacturing capacity, as you know, at CSL, improving Ig yield has always been and is always a core focus. We continue to invest in our pursuit of yield through maximizing data analytics. Collecting plasma, albeit an important part of the process, is only one part of the jigsaw. We recently completed Modules 5 and 6 at Bern, which has added 8 million liters of additional Ig capacity. Investments in these types of projects are costly, but absolutely necessary.
Demand has and will continue to remain robust. It is the only reason why we continue to invest in our facilities. And there are some driving forces supporting this type of growth, including leading indicators of disease diagnosis that are now returning. These include bronchitis, ear infections and respiratory infections. Many patients, even in Tier 1 markets remain undiagnosed. Patient groups in the U.S. have run awareness campaigns as multiple primary immune-deficient patients are unaware that they have the disease and continue to live unnecessarily with ongoing infections. Ongoing preference for the convenience of home treatment will continue to drive demand for HIZENTRA and approximately three quarters of targeted physicians are now using HIZENTRA to treat CIDP patients. These patients not only come from Privigen, but also from other intravenous products.
Demand for treatment of secondary immune disease continues to grow. Many new cancer treatments require suppression of the immune system prior to treatment. Patients then need to rebuild their immune system. Ig is usually the only answer. Even though incidences of diseases are similar across geographies, I want to remind you that the rates of Ig consumption are not. Ig in the U.S. is still consumed at almost 3x the rate per head of population when compared to Europe and we are currently seeing strong growth opportunities outside the U.S. The world needs Ig.
Before I leave CSL Behring and move to CSL Seqirus, I just want to say this. At CSL Behring, we are the leading plasma collection company with capabilities and continue to innovate to be the industry’s largest and most efficient. Operationally, we could not be better placed for capacity both on a collections and manufacturing front. We are doing everything we possibly can to ensure patient demand and make sure that, that patient demand is satisfied with our products.
Now changing gears and moving on to Slide 13 in our influenza vaccines business, CSL Seqirus. As I said from the outset, CSL Seqirus has delivered another exceptional performance in fiscal year ‘22. Total revenues were just short of $2 billion, up 13% at constant currency with seasonal influenza vaccines up 16%. The increase reflects an ongoing shift to CSL Seqirus’ differentiated products, particularly FLUAD, our adjuvanted product, which was up 41%. The Northern Hemisphere continues to be the dominant market for CSL Seqirus with EU and UK delivering particularly strong growth, up 42%.
Continuing with CSL Seqirus on Slide 14 and some of the operational highlights. CSL Seqirus continues to achieve significant growth in seasonal influenza vaccines, which, as I mentioned earlier, saw a record volume of 135 million distributed doses globally in fiscal year 2022. In the U.S., CSL Seqirus delivered vaccine revenue in excess of $1 billion for the first time. They were also awarded a new pandemic contract by the U.S. government, BARDA, for the development of two influenza A virus vaccine candidates using both our cell-based adjuvant and combination technology platform and our self-amplifying mRNA technology. We have achieved pandemic-ready designation from the U.S. government for Holly Springs. In Europe and the UK, CSL Seqirus continued to achieve heightened recognition of the benefits of our differentiated products, namely from the Joint Committee on Vaccination and Immunization in the U.K, and we successfully launched FLUAD in Ireland. We continue to work with regulatory bodies and are pleased that the CDC adopted the Advisory Committee on Immunization Practices for FLUAD to be one of the preferentially recommended seasonal vaccines for adults aged over 65 in the U.S. Exciting opportunities for CSL Seqirus going forward and a great, great job by the team.
Moving on to R&D on Slide 15. And just whilst we are here, the annual CSL R&D Day is to be held virtually on November 3. So with that in mind, I’ll only provide some high level comments as we move through some exciting developments in the CSL pipeline of assets. Starting with immunology, we are so excited to announce the positive top line data today for garadacimab for HAE. The study met its primary and secondary endpoints and also demonstrated safety and tolerability. These results underscore our belief that garadacimab has the potential to become a transformative first-in-class therapy for people living with HAE, a patient group that CSL has been serving for many years. CSL aims to begin filing with global health authorities by the end of this fiscal year for approval in the U.S. In hematology, the primary endpoint was achieved for etranacogene, also known as EtranaDez, with submissions now made to European and U.S. regulators. Notably, it has been fast tracked in the U.S. and if approved, will be launched in 2023.
Moving over to cardiovascular and metabolic. The Phase 3 trial for CSL112 continues to progress well with over 80% enrollment achieved and last patient in estimated to be the end of this calendar year of 2022, with primary completion date 12 months thereafter. Top line results will be released once the study has been completed and the data has been analyzed. In respiratory, beyond garadacimab for treating HAE, we have initiated a Phase 2 study for the treatment of idiopathic pulmonary fibrosis. Garadacimab has the potential to be another flagship molecule for CSL, and of course, it is a homegrown monoclonal antibody. In influenza vaccines, FLUCELVAX, with the most notable development was achieving 6 months and older age indication in the U.S. and Argentina. And FLUAD Quadrivalent adults 50 to 64, the Phase 3 study, enrollment is now complete.
With that, I am now going to hand over to Joy, who will provide some details on our financial statements and an update on our sustainability strategy. Joy?
Joy Linton
Thank you, Paul and good morning everyone. As Paul said at the beginning, CSL has delivered a good result in line with our expectations and at the top end of our guidance. Reported net profit after tax was $2.255 billion, a decline of 5%. On a constant currency basis, net profit after tax was $2.236 billion, down 6% after adjusting for a currency tailwind of $19 million. The main features of the result, which Paul has touched on are the lower Ig sales due to the constrained plasma collections in financial year ‘21, offset to some extent by the strong performance of IDELVION and CSL Seqirus. We have seen an increased cost for plasma collections and higher fixed cost absorption this year, and that has caused downward pressure on the CSL Behring gross margin as expected.
With the strong increase in plasma collections over financial year ‘22, the fixed cost per unit will be absorbed over higher volumes, and this will start to have a beneficial impact on the gross margin over time. The FY ‘22 result also included at the NPAT line, the costs incurred to date associated with the Vifor acquisition and a contribution from the manufacturing of COVID vaccines, which will not repeat in FY ‘23 and the net effect being a contribution of around $70 million.
Looking at the financials in more detail. Our total revenue was up 3% to $10.7 billion. Gross profit of $5.8 billion was steady. EBIT was down 8% to $2.9 billion, the main factor driving this is our increased investment in R&D. And NPAT was down 6%. On a reported basis, EPS was down 8%, and this is due to the shares we issued as part of the capital raising for the Vifor acquisition in December 2021 and January 2021. Cash flow from operations was $2.6 billion, down 27% from the prior year. And the single biggest factor driving this was the significant increase in inventory due to the higher plasma costs per liter and the improved plasma volumes we collected. Other factors impacting cash flow were the lower profit before tax and an increase in trade payables consistent with the increase in inventories as well as timing changes relating to rebates and influenza vaccine returns. Despite the lower net profit and the issue of shares in support of the Vifor acquisition. We have maintained our final dividend at $1.18 per share, bringing the total dividend for the financial year ‘22 to $2.22 per share. For Australian shareholders, the final dividend translates to approximately AUD1.68, up 6% and is franked to 10%.
Turning to the segment results on Slide 19. For CSL Behring, total revenue was up 2% at constant currency. The increase in other revenue was due to the significant increase in GARDASIL royalties and the revenue we received from manufacturing the AstraZeneca COVID-19 vaccine. And as Paul mentioned, that contract has now been completed. Gross profit was down 4%. And as I’ve mentioned, the higher costs of collecting plasma and the fixed cost absorption underpinned the decline in CSL Behring’s gross margin to 53.3%. The arrival of a new COVID variant at the beginning of the calendar year, together with challenges of attracting and retaining staff has delayed the expected gross margin recovery. For CSL Seqirus Total revenue was up 13% and gross profit up 16%, an exceptional result, reflecting the strong demand for influenza vaccines and the continued success of our product differentiation strategy and improved manufacturing efficiencies.
On the next slide are the group’s expenses with the changes for the period shown on a constant currency basis. Our investment in research and development was up 17% to $1.16 billion, and towards the top end of our guidance of 10% to 11% of revenue. We have continued to invest in innovation and have a number of exciting programs coming to fruition, as Paul has outlined. Despite an increase in our spend on etranacogene pre-launch activity, we have managed to hold sales and marketing expenses steady compared with the prior year, and this reflects our strong focus on managing costs. General and admin expenses were also well controlled, particularly after taking into account the costs we have incurred with the Vifor acquisition. And finally, the effective tax rate for FY ‘22 was down modestly to 18.9%, and we expect the tax rate to remain in the 18% to 20% range for FY ‘23.
Moving on to Slide 21 and inventory. Here, you can see the various components that make up our inventory levels split between raw materials, work-in-progress and finished goods. While the graph gives the appearance of growing inventory volumes, which is accurate to some extent, it also reflects the increase in the cost per liter of plasma. By contrast, we’ve had to judiciously manage the tension between patient demand and supply chain needs within finished goods. And at the end of the year, we have continued to have a lower level of cover of finished goods than we need, particularly in today’s supply chain environment. As plasma volumes continue to improve, we will need to rebuild our finished goods inventory levels over the next couple of years so that we have a more comfortable level of inventory on hand both to meet patient demand but also to be able to better manage our supply chain costs.
Turning to the next slide and our debt profile. And here, you will see the maturity of – maturity profile of our debt. This has significantly and materially changed following the very successful $4 billion debt raising in the U.S. 144A market. This debt raising delivered an excellent outcome and gives us enhanced flexibility to fund future growth. We now have a diverse mix of debt with a full range of maturities out to 2062. The average weighted tenor is just under 12 years, and the weighted average cost of debt is 3.38%. Overall, our balance sheet remains strong and our A grade credit ratings have been maintained.
Moving on to the next slide and our sustainability strategy, as you know, we communicated our sustainability strategy 12 months ago, which was focused on three key pillars of the environment, social and sustainable workplace. And as part of this strategy under our environment pillar, today, we are announcing our new carbon emissions reduction targets. These will serve as a transparent road map to decarbonize our global operations by cutting both direct and indirect carbon emissions. By 2030, CSL is targeting a reduction of 40% of absolute Scope 1 and Scope 2 emissions against a baseline of the average annual emissions across FY ‘19 to ‘21. And we intend to ensure that suppliers who contribute two-thirds of Scope 3 emissions will set Scope 1 and Scope 2 target reductions aligned with the science-based targets initiative. CSL looks forward to achieving Scope 1 and Scope 2 emission reductions through a range of key initiatives, including increased energy efficiency, pushing towards more renewable power, switching fuels to less carbon-intensive energy sources and over time, redesigning our manufacturing sites.
Aspects of this work are already well underway. Our facilities in Liverpool, the UK and in Bern, in Switzerland, today source renewable energy. Our new R&D complex in Marburg, Germany, our new headquarters in Melbourne and our new cell culture facility also in Melbourne, will feature state-of-the-art sustainable design features. To achieve our Scope 3 target, we will be working with our suppliers through a range of initiatives, including revised procurement standards and award criteria, through supplier enablement with advocacy and education and strategic partnerships to innovate and collaborate. As a scientific and data-driven company, we are undertaking these specific measures and analysis to ensure that we continue to set and to meet the right targets for the road ahead. At the most senior levels, our Corporate Governance and Nomination Committee of the Board will have oversight of these goals. And with the Executive Sustainability Committee that I chair, we are creating a culture of accountability across the CSL enterprise.
And with that, I will hand back to Paul, who will finish up with some comments on the outlook.
Paul Perreault
Well, thank you, Joy. And now on the outlook for fiscal year 2023, so let’s look specifically at CSL Behring. We see a continued improvement in plasma collections and that is expected to underpin strong future sales growth for our marginal leader products, Ig and albumin. The higher cost of plasma is still evident and expected to prevail in fiscal year ‘23 and we are looking to replenish inventory to a level that gives us more confidence on our ability to meet the patient’s needs and the demand that’s coming and in a more cost effective way.
For CSL Seqirus, product differentiation will continue to drive strong demand for our influenza vaccines, particularly FLUCELVAX. And across the enterprise, we expect to continue to be faced with challenges in the external cost environment whether that be inflationary pressures, staffing constraints or the logistics and supply chain challenges.
In terms of guidance for fiscal year ‘23, we expect revenue growth to be in the range of 7% to 11% over the fiscal year ‘22 at constant currency, with net profit after tax expected to be approximately in the range of $2.4 billion to $2.5 billion at constant currency. On a like-for-like basis, this represents a growth of between 10% to 14%. This all excludes CSL Vifor earnings and costs associated with the acquisition as well as the nonrecurring COVID vaccine contribution. Guidance for the CSL Group will be updated to include CSL Vifor at the first practical opportunity. Of course, our forward-looking statements are subject to the usual disclaimers as mentioned at the start of this presentation. I guess to close, I am absolutely certain, absolutely certain, that the fundamentals of our business are strong and the diversity of the pipeline is rich and that we are really set up at CSL to build on our track record of sustainable growth for years to come.
And with that, we will now be happy to take your questions.
Question-and-Answer Session
A – Mark Dehring
Good. Thank you, Paul. Operator, if I could ask you to open the lines up. Our first question comes from Andrew Goodsall at MST Marquee. Andrew, go ahead please.
Andrew Goodsall
Thanks very much for taking my question. Just the results got a lot of noise in it, obviously, with non-recurring items, Vifor acquisition etcetera. I guess just on a ballpark level, just trying to get a sense of where you think you landed on an organic basis with EBIT or NPAT or even just your exit rate, just trying to get a sense of where your sort of base level trading was?
Joy Linton
Thank you, Andrew. I think what we have tried to do here and acknowledge that closing the acquisition of CSL Vifor on the 9th of August when you announced our results on the 17th of August is slightly tricky. So we are – we will come back to the market as soon as we are able. As you know, we need to also do the acquisition accounting work and get a good look at how we think intangibles will be valued or the fair value of the whole balance sheet really for Vifor. And that’s just going to take us a little bit of time. So what we have tried to do here today with our forward guidance of $2.4 million to $2.5 million at NPAT is very much the legacy company, the underlying performance of the business we’ve outlined today being CSL Behring and CSL Seqirus. And I think we’ve tried to be transparent on just making sure we’re clear that we’re – the COVID vaccine contribution doesn’t repeat in FY ‘23. The notes of the financial accounts are very clear on what Vifor costs sit in the FY ‘22 numbers that – I’d point you to Note 2 of the accounts. And then we have excluded efforts, anything to do with Vifor in that forward guidance of $2.4 million to $2.5 million including interest costs, any contribution, any acquisition or integration costs, so an underlying performance sort of guidance of sort of that 10% to 14% on a go-forward basis.
Andrew Goodsall
Okay. That’s great. So 10% to 14% is your sort of underlying business before we think about Vifor?
Joy Linton
Yes, that’s correct. Yes.
Andrew Goodsall
And perhaps my second question just for Paul, just in terms of the plasma business, it does look like the exit rate for second half gross margins were ahead. And I think that’s probably a reasonably sort of clean number just looking at Behring. Just ask you to sort of, I guess, sort of the green shoots you might be seeing across the markets that you are in and the – I guess the opportunity. We know that European price is up quite considerably just, I guess, as more volume comes on. Is that an amplifier sort of effect?
Paul Perreault
Look, I would say, Andrew, that the exit rate in the second half is a good indicator. I mean, we are slower starting in the second half than we would have expected with Omicron, some of the massive weather issues they had in the U.S. in the wintertime, etcetera. But these variants continue to come up, and it affects staffing, it affects donors, it affects kind of everybody that’s out in the business, but having said that, as we look at the exit rates, we feel very confident that things have been improving quite well. The costs are up, we know that. We have had to retain and acquire new staff, thousands of people actually. And you look at the centers we opened last year, that’s all staffing as well. And the cost of that staffing is high, because you are not getting throughput in those centers, they are brand new, right. And we normally say it takes 1 to 3 years to get a center up and running with COVID. We have opened 73 since the start of the pandemic, centers. And I’d say that, that rate of ramp up has been closer now to 2 to 4 years just because it’s longer during the pandemic to get them up and running. So I would say that, that’s really something where we’re trying to make sure that we’re in the right area. I would say that when we look at the fiscal year for Ig and we take a look at the first half, we were down about 9% on previous quarters or previous period. And in the second half, we were up 6%. And so overall, we ended up at minus 3% for the fiscal year. Pricing, I would just be cautious on. I’d just say that everybody’s got their eye on pharmaceutical costs as you might be well aware. And we will continue to look at opportunities with tenders and other things to optimize our portfolio and the pricing that we have in a responsible way.
Mark Dehring
Thank you, Andrew. Our next question comes from Saul Hadassin at Barrenjoey. Go ahead, Saul.
Saul Hadassin
Thanks Mark. Good morning, Paul and Joy. Paul, just a question on Ig in general. So we have seen the first FCRN product launch with an indicator in myasthenia gravis. It looks like sales have done relatively well, albeit in the early stage post that launch. But the data on CIDP is out, I think, first quarter next calendar year, you spoke positively about the outlook for Ig in general. Are those your thoughts on that change at all if indeed there is a CIDP indication that is approved to come, say first quarter calendar year ‘23?
Paul Perreault
Not really, Saul. I think we are still very bullish on the fact that Ig is a standard of care. This isn’t going to be a transformative product at least not from the interim results they showed in their trials. So, I would say, unless they had some major change in their efficacy rates and response rates from interim to final Phase 3 results, you have to have a product that is really completely transformational like an IDELVION to make a difference to penetrate a market, especially in a chronic disease where patients don’t want to get sick and Ig has been the standard of care. Everybody wants to point to the takeover of Ig with a product. It’s not really going to affect PID it’s not going to affect SID. If it has a decent effect and depending on the pricing and the cost and the access, sure, they will get some market share, but the likelihood that this is going to happen overnight or change my outlook for this year or our current strategic plan in terms of demand, we see the demand growing in a lot of areas with Ig still. And I think I pointed out also the fact that there’s still an underutilization in terms of grams per capita per 1,000 head of Ig in many countries.
During the pandemic, there is still a lot of need and demand for Ig outside of the U.S. I know people have looked at some of the numbers in U.S. Ig, which tends to be the flavor of the day, every result. But people have satisfied a lot of that demand. And let’s be frank, I mean there has been less diagnosis during COVID of rare diseases, because you can’t diagnose rare disease through telemedicine. You have to have these patients face to face going through history for a long time. You have to do multiple testing to really get to the underlying condition as opposed to the symptoms that these people are exhibiting. So, we are seeing a return as things return to normal in terms of physician office access, hospital access, testing coming back online. During COVID and just after COVID started to apparently subside, although we are still seemingly in different waves, you couldn’t even – it was months and months even in the U.S. even to get an MRI done. And the specialized testing that has to get done for patients come in, take time and access. So I think I am still very, very bullish, as you might tell, on Ig and the growth that we see from a demand perspective, from a patient perspective, and an efficacy perspective. And so I am very positive on it.
Saul Hadassin
Thanks, Paul. Just to up on that. The commentary around albumin was probably a little bit softer than what we had expected commentary around competitive pressures, pricing and I guess even just the underlying demand profile. So, where – is the confidence still there that you can maintain two core proteins per last liter over the next few years?
Paul Perreault
Yes, yes. I think the demand for albumin in China was pretty strong. And the problem with Europe is they had to go to other things, because it wasn’t widely available. It still goes back to the plasma collection issue over the last couple of years. And that’s really the impact. When there is more product available I feel very confident that albumin will be there. And China still continues to be a key driver for sure. It’s just that everybody also understands that and that’s why the pricing pressures just get a bit more tight in terms of the competitive nature of the beast, right. So I think that’s kind of what I was trying to get across.
Saul Hadassin
Thanks.
Mark Dehring
So, next question comes from David Low at JPMorgan. Go ahead, David.
David Low
Just starting with the plasma collections, I mean we see that the strong growth that’s been reported by your competitors as well. Just wondering how you think we should think about that extrapolating into sales. I mean, is that 20% plus growth in volumes going to contribute to that level of growth in volumes of immunoglobulin and albumin in FY ‘23?
Paul Perreault
No, David, I think as we take a look remember, we don’t start with 24% sitting, ready to sell, right. I mean this is a python that swallowed a goat. It takes a long time for this to pass through the system. And so that 24% didn’t come all in 1 month. It’s been coming as we go right. So, it has to go through our long production process that we have talked about. It gives us confidence in our ‘23 numbers for sure, but we’ve also been running on fumes, right. I mean our inventory levels have been exhausted pretty much to a point where we have a safety stock for sure, because we want to take care of patients. But we’ve also had to limit growth in other countries because of the amount of finished goods inventory that we had going forward from the last couple of years of plasma collection. So I think as you think about it, think about the fact that we have to get those inventory levels back up. I mean, if I had more product to sell you would have seen an even better growth in the second half than the 6% of Ig, and that just shows the underlying demand. But you can’t just extrapolate that we’ve collected 24% more, that it’s all sitting there ready to pump out Ig tomorrow. So it will happen over the course of the year. So I would say that the exit rate coming out of the second half, moving into the first half is going to be strong. Second half will be stronger. And it really gives me confidence moving past that. I’m obviously not giving guidance to ‘24. But I think it’s really important to understand as you do because we’ve all been looking at this a long time, these long lead cycles to making sure that we can get it out in the appropriate time and get it into the markets to sell. So that’s why – I mean, it’s – you do the math and you say, well, 24%, you probably get 20%, 22% growth on Ig. It just takes a bit more effort to get it through the pipe and make that happen while we’re building inventory and supplying the markets that need the supply.
David Low
No, that’s crystal clear, but I thought it was worth clarifying. The other question I had was CapEx. I mean, Paul, you talked about all the collection centers. You talked about the Bern capacity coming on I believe Melbourne is not so far behind as well. Is there less of a need to expand capacity now that all of that – all those collection centers and fractionation capacity is coming online?
Paul Perreault
Look, it helps in the near-term, David. But I would say that because these facilities take 5 to 6 years to actually build and get validated and licensed, we’re looking towards our 2030 strategy because we do look out 10 years because of the long lead times in the business. And I would say that there still will be some capital that needs to go. I mean, we’re just finishing off some other large capital projects. We have this new R&D facility in Marburg, which will have the capacity to have 600 scientists. We have the new headquarters here in Melbourne, which also has a number of floors of lab space, plus two floors of incubator space to help support the biotech infrastructure here in Australia. We have Banksia going on, which is out of Tullamarine for the cell culture facility. There is still some big projects to complete and to continue – and we’re looking at when we might have to start the next project. So we are obviously trying to manage that very closely and carefully. We are still concerned about return on invested capital. So we want to make sure that whatever we invest in, it’s the right time, and we want to utilize the facilities that we have built in the appropriate way. So when you start them up, we’re also looking at the start-up times and seeing if we can do something more efficient on the start-up of some of these facilities now that they are completed.
Mark Dehring
Thanks, David. Our next question comes from Chris Cooper at Goldman Sachs. Go ahead, Chris.
Chris Cooper
Thanks Mark. Joy, just on the Behring gross margins, you said in February, you expect the cost [indiscernible] in the second half of ‘22 and then continue to recover from there. I just wanted to confirm that was still the expectation. You did state on this call, the gross margin recovery was delayed by Omicron and starting, but I wasn’t clear whether that was already captured by those comments you made at fair?
Joy Linton
Thanks, Chris, for your question. So clearly, in Feb, we didn’t anticipate the length of time that Omicron was going to hang around and the impacts on staffing as Paul has articulated, the additional costs to retain our staff. And really, in the Northern Hemisphere, there was that peak in kind of January, February, with Omicron, but then again in and around Easter. So April was a very sort of challenging month as well. And so it was really only into May where we really started to see plasma collections coming back. And so they were – those first 4 months of the year were pretty expensive months in terms of cost per liter. So that is all still to come through in FY ‘23. And so yes, there is a delay in the return on the gross margin, and we will see a little bit more downward pressure on gross margin in the first half of FY ‘23.
Chris Cooper
Got it. Okay. And perhaps a more specific question on that cost dynamic into fiscal ‘23, so collection costs. Obviously, one of your competitors very notably commented that they were reducing donor compensation by 15% in the June quarter. Are you seeing anything from that across your network at the moment in the U.S.?
Paul Perreault
We haven’t really seen anything that tells us that it’s wholesale across all the areas. Like most of our friends in the industry, everything is kind of local, right? It’s a massive country and the local environment is something that’s there too. So in some centers, we have seen where competition might be not as pervasive where you’ve seen some adjustment in donor fees. I think the new donor fees are one area to look at for maybe some relief, but you’re only talking about somewhere between 4% to 6% of the donors coming through the door are new or lapsed donors that have to be a new donor again coming into the system. And then I think everyone is certainly working on their cost structures. Donor fees is only one part, though, as you know, Chris. So there is other areas that we’re working on, and one of the things will be the new platform that we’re putting in place, which is going to reduce the time on the beds for these donors. And as we roll this out to all of our centers this year, that’s going to be a massive change for people in terms of time for money because over a 30% decrease in time on the bed and on the machine is significant. So we will look for ways to continue to be aggressive and competitive, but also make sure that we’re getting the value for the investments in innovation that we’ve made.
Mark Dehring
Good. Thanks, Chris. Next question comes from Sean Laaman at Morgan Stanley. Go ahead, Sean.
Sean Laaman
Thank you, Mark. Good morning, Paul and Joy. Hope you both well. My question also relates to cost of plasma and gross margin. And thinking about some of those elements, the volumes of plasma on a fixed cost base and the fixed cost base has been expanding as you roll out centers and donor fees, the staffing in the center and then what RECA could mean for the business going forward. So thinking about some of those elements, Paul, I wonder if you could give us a brief comments again on each of them. And if – some of them might actually prove to be quite positive, I mean, if you can get some of those less efficient new centers up and running, donor fees somewhat normalized. And then RECA yields some benefit. If we look into 2040, do you think you can get sort of gross margin higher than pre-pandemic levels, so just all that, some commentary as a question would be really useful?
Paul Perreault
Yes, thanks. Look, as – and I am doing well, thanks for asking, Sean. But I would say that the complexity of this business tells us that there are 1,000 different levers that we’re going to have to push and pull to get to the benefits of all of these items. Because the first thing we have to do is, as you said, get our centers up to snuff in terms of the ones we’ve already opened and to actually get some of that latent capacity, I mentioned the number of beds and the percentage of beds that we had to take out during social distancing with COVID back into the centers because we’re going to need those beds with RECA, right? So we need the amount of beds. If we’re going to be turning the beds quicker because the donor spend less time in the centers and on the machines, so we need to make sure that we have the bays filled and these donors really moving through the system. And time is money. So if you can spend 30% less time in our centers than the competition, then for a change in $1 or so for donor fee, they are more likely to come to our center than another.
The other thing is that it’s a more comfortable donation actually for the donor. And we believe the amount of time that – and the volume of red cells that you have outside the donor at any one time will make that very comfortable. And there is also you don’t have the cycles of the machine and the pumping that people go through with their fist to try to get the volumes moving through during those cycles. So there is so many pieces of RECA that makes so much sense from a technology standpoint and a safety and a comfortable donor experience. That’s why we’re so excited about getting it rolled out.
Now, having said that, there is a lot of execution that we have to stay focused on within that business and part of it is the staffing, right. So we have to make sure that we have staff available and ready when the donors come in the door. And as the donors have started to return, we’ve had to increase cost in terms of the infrastructure that we have and the salaries and the hourly wage that we’ve paid in that retail environment. You see it here in Australia. I mean I’ve been here now another couple of weeks and I was here in June and February. And you see that there is a lack of people working in the areas that – in the service industry that even here in Australia. It’s no different in the U.S., it’s just bigger scale. So you take a look at that across the U.S., and it’s been a major issue for us. So we’ve invested significantly in that. Getting those centers up and running is costly because you don’t have the overhead recoveries that you’d like to see with the number of liters flowing through. But as the liters increase in each of those centers, and we’re doing everything we can to do that through the digital app and the digital analytics that we’ve involved as well as actually contacting the donors digitally has really paid off in terms of the marketing efforts. So I say almost 2 million people have been reached through that new app, which is fantastic. So we saw some really good metrics in terms of donors coming back to CSL.
As we take a look out, the gross margins and where they return to, are a bit delayed, as Joy pointed out, with things being a little bit slower than what we had predicted at half year. But it’s timing. It’s timing. It will start to come back. We have to get the overheads not only through the plasma centers, but through the plants. So as we continue to put more volume through the plants and we will get the overhead recovery on the COGS, and we will – hopefully that will flow back down through the margins. So all of this, including whatever price we might be able to work on, which we’ve done, I think, a very good job over the last couple of years on pricing as we’ve had to allocate product in different markets and been very judicious on tenders that we participate in, all of that has helped us to make sure that we’re pulling on all the levers as well as managing our expenses as it flows down through for margin into the EBIT line and hopefully to the profit line. So all in all, I’d say complex as usual, but I think we have all of the levers that we’re pushing and pulling on to make sure that we get back to the expectations which are high, I know, for us, but happy to take the challenge on.
Sean Laaman
Great. Thanks, Paul. And just one quick follow-up, I just want to check I’ve got the timelines right on 112 in the commentary that you provided. So it’s 80% completed on the recruitment front, maybe you get to 100% by the end of the calendar year, I think you said. Then 12 months to complete the trial and then maybe 12 months to do the analysis to release the headline data. Did I get that right?
Paul Perreault
No. I think the 12 – the end of this fiscal year for the completion of the trial is what we’re expecting. And of course, that’s been delayed through COVID. We expected to already have it completed. But after the completion of the trial, it will take us about 12 months to get all the top line data and everything released. So depending on how fast we can get that data done, it might be 8 months after that, it could be 10, just depends on the data, the complexity and what we have to – the analysis it has to do. So I would say before the end of calendar ‘23, we should have the top line data and the understanding as to where we are.
Mark Dehring
Thanks, Sean. Next question comes from Gretel Janu at Credit Suisse. Go ahead, Gretel.
Gretel Janu
Thanks Mark. So just going back to the guidance. So it does imply costs will continue to remain elevated. We’ve talked through gross margin in quite a bit of detail, but just wondering if you could make any explicit commentaries around guidance for SG&A costs and R&D?
Joy Linton
Yes. Thanks, Gretel, for your questions. So I think you’ll see on SG&A, we’ve actually done a pretty good job of managing those costs, notwithstanding we are investing in etranacogene, which we’re hopeful will come to market. We’re doing quite a lot of pre-launch marketing activity on that as we speak. So that particular cost aside, I think you can expect that our underlying SG&A will remain well controlled in the next period of time. In terms of R&D, I think our guidance is 10% to 11% and see no reason for that to be any different going forward. As Paul has outlined, we have a big load of programs coming to fruition, hopefully, in the next period of time. So we’re continuing to invest in R&D.
Gretel Janu
Great, thanks. And then just in terms of HAEGARDA, the growth is slow in second half ‘22. Are you seeing significant pressure from bioCSL products? And I guess, how do we think about this product now going into FY ‘23? Is it now more of a low to mid-single-digit growth product?
Paul Perreault
No. Look, I think now that patients – again, this goes back, Gretel, to the COVID environment in diagnosing these diseases, people having access to the hospitals. And a lot of these patients that present are in emergency situations, but not always. And so you still have to have the people diagnosing this disease and the people available. So I’d say that demand – patients haven’t stopped getting disease or getting sick just because COVID has been around. So this demand piece is something that I want to make sure that everybody is clear on. The demand for Ig, the demand for these specialty products has not gone away just because COVID has been around. These patients are still sick, still need to be diagnosed and this is the process with rare disease.
So what the percentage of growth will be, will be interesting to see. But I would say I’m not – there are competitors out there. I wouldn’t say that – let me just say that you need to have a product that isn’t going to give you any attacks. And so that’s not the case with all of our competitors. And I would say that the data on HAEGARDA and with the data that – the top line data that we’ve seen with garadacimab, I think we’re going to be in very good shape in the HAE community. We’ve been there for a long time. There has been cannibalization of BERINERT as people have moved to longer-term prophylaxis. But they are going to longer-term prophylaxis with HAEGARDA because they haven’t had attacks. And so I think there is still a lot more growth to come with HAEGARDA and then hopefully, also with garadacimab as we move that through the pipe.
And look, I would just say that specialty is a little bit of an area that I get excited about. Just because I can remember the days when we talked about trying to get the franchise to $800 million and nobody believed me then, that’s fine. But we’re $1.8 billion now. And products like KCENTRA and HAEGARDA are transformational for these patients. And so I just think that there is some real value here because that’s what we’re about, is continuing to innovate. And if we have to disrupt ourselves, then we will. But we want to bring the best to the market. And HAEGARDA is much better than some of the competition that is currently available.
Mark Dehring
Good, thanks, Gretel. Next question comes from Steve Wheen at Jarden. Go ahead, Steve.
Steve Wheen
Thanks Mark. Paul, I just wanted to go back to the guidance, particularly around the top line, the 7% to 11% and think about that in the context of Ig growth. Because I just wondered to what extent is Ig growth being constrained by your efforts to rebuild the inventory over the next year?
Paul Perreault
Yes. Thanks, Steve. I would just say that we’re going to grow as fast as we can with the appropriate caveat of building back that finished goods inventory. So if we continue to see – remembering that anything we’re collecting starting like the next couple of weeks really goes into next fiscal year, not ‘23, what’s already been collected has been collected. Now it’s up to Paul McKenzie sitting next to me here and his group to make sure that we have all the available slots and production lines ready to go. Now having said that, it does take time to get it through, fill and finish, etcetera labeling, etcetera. And we have the various markets in Europe that need to be replenished as well as making sure that patients around the globe have access. So it’s hard for me to give you an exact number between the finished goods inventory and the growth but just say I’ve never been shy about trying to get additional growth.
Steve Wheen
Yes. Okay. Fair enough. And then just with regards to those new products that are coming into the – with garadacimab into HAE and etranacogene into heme B. If you could have a comment as to do you expect to see some cannibalization of your existing product? And if so, is that a mix change that might ensue if those products are approved? Does that mix change cause a margin benefit accretion as a result?
Paul Perreault
Yes, sure. Look, I think garadacimab, the answer would be yes. And it would be cannibalization. But it would be, I would say, market share gains as well based on the product profile, right, from others outside of my own product portfolio. The main thing that drives us, as you know, Steve, is to make sure that we have the most innovative, differentiated, best product and efficacy and safety available for patients. And if that’s what we’re delivering with garadacimab, then I would expect it to do really well and be a good earner for the company. In terms of the etranacogene, I’d say that, yes, this is a transformational potentially product for gene therapy. It would be the first gene therapy in hemophilia and really in heme B, a smaller market than heme A, of course. But I would say that from that perspective, it’s also a gene therapy that is under a lot of scrutiny by both patients and regulators. Not saying that it’s not going to get approved by any stretch. But all I would say is that people will be picking and choosing when they start that program. It’s not going to be indicated for the pediatrics at first, for sure. So there is going to be a more limited start. And I would say, over the next couple of years, it will continue to deliver, and it will be a good earner as well because it is a basically – we’re looking at sustainability data out for a long time with one dose. So yes, I would say that the changeover would be quite helpful from a margin perspective.
Mark Dehring
Good. Thanks, Steve. Next question comes from David Bailey at Macquarie. Go ahead, David.
David Bailey
Yes. Thanks, Mark, Paul and Joy. Just maybe just on Seqirus, the last couple of years, we’ve seen some good revenue growth on the back of mix shift, and that’s also supported some gross margin expansion. I’m just wondering if you think that there is still room for higher growth of higher-priced products into ‘23? And any quantification of benefits from the completion of the expansion at Holly Springs and Liverpool would be good too?
Paul Perreault
Yes. Look, David, I think there is a couple of things. So the real-world effectiveness data that’s also being generated with FLUCELVAX and FLUAD has been fantastic. So this will expand and continue to expand the strategy we had of innovative, differentiated, higher-priced products because of the technology and the efficacy that it’s shown. So these are the things that make a difference. As you know, one of the key drivers of our growth is differentiated products and a portfolio that’s high value. So I think there is still a lot of room to grow. There is more people that want these products around the globe. It’s hard in the Northern Hemisphere, which is the main markets, right, is to get it all out at the same time because everybody wants it all at the same time. And that’s why we’ve invested in capacity, fill and finish, yield.
One of the things that people may not be aware of is I haven’t lost my way at CSL. It’s yield. Yield is gold, right? So it’s not only yield in Ig, it’s yield in flu, right. So we’re working and we have programs going on, on yield improvements in influenza as well. So that’s the thing where we continue to drive the basics of what’s gotten us to where we’ve gotten to today. I haven’t forgotten about the things that are the key drivers for CSL. And yield, whether it’s cell culture or plasma is gold. So we will continue to move on that. But the differentiation, you look at the recommendation that we had in the U.S., I’m sure that there are some people that also – I compete with that weren’t happy with the recommendation, but the data proves the day. This is indicated for 65 years and older with FLUAD and it is a preferential product for the elderly because it is what the elderly needs. You need the adjuvanted vaccine for those people that have immunosenescence so that the immune system can compensate. So the value of this portfolio continues to expand. The ask from people continue to come. And we’re going to continue to – we’re building a new cell culture facility in Tullamarine that’s not a small facility. And so I wouldn’t be building it if I didn’t think there was more to come, David. But I do think there is a lot more in Seqirus.
David Bailey
And then just maybe just interested in your thoughts around the supply and demand of plasma, I mean the industry has added quite a few more centers over the past couple of years. Thinking medium to longer-term, do you think there is a risk of potential for oversupply or do you think you need to have these centers to meet the demand for Ig and other products? But then on the demand side, again, I’d also be interested in how material new patients are to demand for Ig versus existing users as well.
Paul Perreault
Yes, sure. No, look, the demand is there. I’m convinced that the medical demand is there. You can go back to – and I’ve been around long enough to remember the early 2000s when there were real shortages of Ig in the marketplace. And the demand was always there and people were worried, well, there is all this oversupply. Well, it’s because people were still hoarding product because they didn’t think we were coming out of the shortage. Once they finally realized they could prescribe Ig with confidence, there was nothing but a straight upward line in terms of uptake. The demand was just constrained by the fact that people were constraining the supply, even though manufacturers were continuing to build that supply and thank goodness we did because we needed it coming out of that era.
Here, when you look at the amount of Ig that the industry is producing, I mean it is more than 10x what it was back in those days. And so to oversupply would mean that somebody would have to collect, manufacture and be holding like a year’s supply just to oversupply. Because you can oversupply for 1 month or 2, maybe, but it goes back to the question I had earlier about the 24% increase. It’s in the pipeline, it takes time. So if you sell it all in 1 month, then you’re going to be short the next month. It’s going to be really hard to oversupply for any one company. The raw material is key obviously. You can’t make orange juice without oranges, right? So you have to make sure that you have that precious raw material that these wonderful donors show up and stick their arm out to provide us every single day. But by the same token, you have to have an infrastructure that’s of scale when you’re the scaled player in the industry. So I have no doubt that we’ve done the appropriate things. This year, we will still have some new centers on the books, but not as many as last year because you know what, we have to focus. We have to get those centers that we’ve already put in place up and running. We got to get the beds back in the centers. And by the way, I have to change the engines while we’re flying the plane to get the new platform for plasmapheresis implemented in all the centers. So yes, I think the demand is there. Yes, yield helps because that limits the number of new centers you have to build if you can get some significant improvements in yield. And if you can get more plasma from the individual centers by having donors spend less time on the beds, that’s also a benefit for us. So we take all of that into consideration when we look at our projections for investment in the number of centers that we need to open.
Mark Dehring
Thanks, David. Excuse me. Next question comes from David Stanton at Jefferies. Go ahead, David.
David Stanton
Good afternoon, everyone. I hope everyone is well. Thank you for taking my question. Just following up on David Bailey’s question actually, you’ve got adjuvanted egg vaccines in Seqirus, over 50% of revenue now. What can that get to going forward? Do you think is it going to top out at circa 70% or stay approximately where it is now?
Paul Perreault
Well, look, I’d say it’s in – and thanks, David, yes, I hope you’re doing well, too. But I think that the egg adjuvanted vaccine needs to move on to cell adjuvanted, right? I mean that’s our goal, is to continue to innovate that product from egg to cell. And that’s where our clinical focus in that area is being focused right now and the R&D portfolio in Seqirus is in that area. So I would say that where will it top out? It depends on how we expand the market, right? And I think there is still not enough people getting vaccinated for flu. And so you have to take into consideration the current vaccination rates to that percentage where we’ve climbed and what that percentage rate would be. I mean if it stayed static, but I expanded the market further, then I’m fine, right? So that’s the question. But I can just tell you that our plan is that we see a continued need for continuing to improve not only the process and the product but also the volumes that we’re producing. You saw that big increase. It just shows, again, our ability to compete and – with some very big competitors in the marketplace. I’m very proud of the team. They have done a heck of a job. So of course, like you all expect me, I expect that they’ll continue to do better than they tell me as that.
David Stanton
Understood. Thank you. And perhaps a question for Joy and my second question, could you give us the net transaction fees you paid for Vifor in 2022 and what you expect those to be in ‘23, please?
Joy Linton
Yes. Thanks, David. So if I’ll point you to Note 2 of the accounts, which go through it in all its glorious detail, it does come out to at an NPAT basis a little bit over $60 million in the financial year. And I think our guidance back at December was that it was kind of circa $200 million all up, and our view on that hasn’t changed.
Mark Dehring
Thanks, David. Next question comes from Craig Wong-Pan at Royal Bank of Canada. Go ahead, Craig.
Craig Wong-Pan
Great. Thanks. Just with the collections of the bed that were temporarily removed during COVID, there was the point made that you can put about 5% of beds back into those centers. I was wondering how much of that 5% has been put back at the end of June or what time line you expect those beds to be put back in?
Paul Perreault
Yes. Thank you. We actually took out 10% of beds, and we still have about 5% to put back in. So we’ve already put back in 5%. And it really depends on the local jurisdictions and the current social distancing that still goes on in certain counties of certain cities of certain states in the U.S., it’s all local. So that’s the reason that we haven’t put all the beds back in yet, is that it really depends on the local requirements for COVID. And some areas are, I would say, a bit tighter than others. So we have about 5% left to go. And hopefully, through the course of this year, we can put those back in.
Craig Wong-Pan
Okay. Thanks for clarifying. And then the second question, just around donors. And you mentioned there were a few marketing initiatives and engagement with Gladstone. That saw I guess, increase in collections. I was wondering whether your information shows whether there is been any donors returning because of higher cost of living or economic conditions. So I was wondering whether those factors have had any influence on those donors coming back.
Paul Perreault
Absolutely. Inflation is running about 9% in the U.S. The gig economy is somewhat full. There is enough Ubers around at the moment and other things. But I would just say that people are feeling the pinch. And so petrol prices, even though the current administration will claim that it’s come down, which it has over the last couple of months, it’s still higher than it was a year ago. So there is – everybody is feeling it. And this is a time when new donors and our marketing efforts get people aware of what we actually do in these centers that they drive by every day. Because unless you’ve been in, you don’t know what goes on, right? So it’s really about the marketing campaigns and getting people back. Some of them are lapsed donors. And if you’ve been out of our system for more than 6 months, you have to present again as a new donor. So we call those lapsed donors. They are familiar with donation and they lapsed for certain reasons. I mean it could be that they got a new job, they went part-time, full-time, they had children, they got to stay at home, they have left college, so they actually graduated, which that’s always a good thing, if you’re going to college. And they then are not in the same areas where the plasma centers were located. So people move around the U.S. quite a bit and so all of those are reasons that people may lapse. And then during this time, the economy does have an impact.
Mark Dehring
Thanks, Craig. Next question comes from John Deakin-Bell at Citi. Go ahead, John.
John Deakin-Bell
Thanks, Mark. A quick question for Joy. Apologies for getting into the detail. But on that Note 1 on segment information looking at the gross margin there, you’ve got segment gross profits for 2022 53.3%. If we look at the second half, it’s 52.5%, but that includes this COVID revenue and profit, which is very high. If I back that out, it looks like the gross margin has gone to 51%, 51.5%, and you said the first half ‘23 gross margin is going to be lower. So – and obviously, the COVID doesn’t repeat. Are you confirming that ex-COVID, margin is probably 100 basis points lower. The gross margin in the first half is going to be more like 51% or 52%?
Joy Linton
Without confirming your exact numbers, you’re directionally correct, John, yes.
John Deakin-Bell
Okay, okay. Thank you. And just on the outlook slide, you talked about the early data, indicates no change to the contribution from Vifor. I know you’re going to talk about it in October we need to forecast it now. So can we assume from that those EPS accretion numbers that you put out at the time of the acquisition, that they are all still valid?
Joy Linton
I think what we would say is we’re not in a position to do a positive validation of them. But what we can say is based on what we’ve seen to date, we have no reason to suggest that – it’s a bit more of a negative assurance perhaps, John, rather than a positive one. I can’t sit here and validate it because I haven’t actually got all the data yet. But based on what we have seen, we don’t see anything yet that would suggest it’s not still valid. That’s correct.
John Deakin-Bell
Okay, thanks very much.
Joy Linton
Just for the nuance, but hopefully, you can appreciate the position we’re in on that. I think what we would say is we’ve seen the bank account and the cash is very strong, which is very encouraging.
Mark Dehring
Thanks, John. Next question comes from Andrew Paine at CLSA. Go ahead, Andrew. Andrew, you on mute? Okay, we are not hearing you. Andrew, maybe we can circle back afterwards and have a chat. Next question comes from Lyanne Harrison at Bank of America. Go ahead, Lyanne.
Lyanne Harrison
Hey, good afternoon, all. Can I just follow-up on those questions on Seqirus. As we head into the Northern Hemisphere winter, how does demand and negotiated prices compared to where you were this time last year?
Paul Perreault
Good. I think we’re in pretty good shape, Lyanne. It’s – we – there is clearly a lot happening in the markets in the U.S., but I would say that we’ve done very well on the negotiations and on the delivery actually. So we were first to market in the U.S. We had a lot of releases in July, which is quite early. And that bodes well for the rest of the season, because the sooner you get out, the sooner it gets into arms and the less returns you have at the end of the year. So I am pretty confident that Seqirus is on the right track so far.
Lyanne Harrison
Okay, thank you. And just one final question for Joy on the inventory, obviously, we’ve seen the inventory balance go up 15% as of June. Can you give us an indication of how much of that increase is volume versus cost?
Joy Linton
Thanks, Lyanne, for your question. I’m not sure I have a split between the two at hand, what – but it’s both, right? And so you should think about it both as higher volume coming through off the back of higher plasma collections. But clearly, the cost is higher as the year has gone on as well. It’s also got Seqirus – timing of Seqirus in there as well. So yes, it’s both, Lyanne, yes.
Lyanne Harrison
Okay, thank you very much.
Mark Dehring
Good. Thanks, Lyanne. We will need to draw to a close very soon, so we will need to make the next question our last and that’s from David Nigam [ph] at Evans & Partners. Go ahead, David.
Unidentified Analyst
Hi, thanks very much for taking the question. Just actually just a couple of high-level questions. So firstly, you’ve noted the strong culture and employee satisfaction, which is very admirable and I reckon – I think this is happening in the backdrop of global staffing calendars, which you’ve also mentioned that you described the Omicron wave impacting on that. And then you’ve also talked about your ongoing investments in pipeline and R&D. So just curious, what are your strategies to continue to attract the key research collection staff, the key people? And what do you impact do you expect this will have on your OpEx and salary lines going forward?
Paul Perreault
Well, look, I guess it’s one of those things where we continually look at our employment staff and what our ability is to retain and attract how competitive we are in the marketplace. So, all of those things go into our thinking and our projections. Once you add people to staff, then there is cost incurred and we’re looking for value as well. So one of the things we try to do is to make sure that we’re focused as an organization, David, to make sure that we only hire when we need people to actually do the hard yards, right? It’s easy to lose your way. And R&D is one of those areas where there is a lot of – I mean, there are billions and billions of wasted money in R&D in our industry. And it’s because there is a lot of pet projects, a lot of things that companies focus on that don’t deliver, but everybody is afraid to stop them because everybody has their favorites.
And I’ve seen it for a very long time, and that’s why Bill Mezzanotte, our Head of R&D, and myself, sit and review every single project in our portfolio twice a year to really make sure that we’re focused on the right areas, that we’ve seen progress or not progress. We will stop projects, which is not popular in the company. Still probably have some people mad at me for projects we’ve stopped through the years. But it’s because the science is good. But if it’s not going to see a benefit for patients or see a commercialization of the product, then why are we doing it, right? I mean you have to do some basic science to get the data and move it through. But people want to deliver, and we need to deliver because that’s the only reason we exist, is take care of patients and protect human health. Without that, we shouldn’t be in business. So it’s really important to me that we focus as an organization.
I think when people come in sometimes from other big organizations, they see that we actually expect them to do the work and many people are energized by that because even though we’re a big company and there is bureaucracy because David, if you and I started a company together, we’d probably have politics with just the two of us. But that’s the way people are at times. So we have to earn the trust and we have to earn the delivery, and we have to earn the culture and have people really living the culture. So holding people accountable for what they do and the culture is also important. So when we do objectives, it’s not just, did you do the job, but how did you get it done? And we hold people to that. And that’s what you have to do if you’re going to drive a culture in the organization. So having said that, people are expensive and it’s gotten more expensive. And so we do need to be competitive. We’re a global organization. We have people in over 38 countries. We have now with Vifor, CSL Vifor, 30,000 employees. So it’s a big business with a lot of people. And we have to make sure that we’re competitive. And I think we’re doing the right thing. It’s just a constant talking, collaborating, explaining, communicating with the employees in terms of our mission, our vision and what we’re trying to achieve for patients around the globe and connecting them with patients. Whether it’s plasma donors, whether it’s employees, we try to connect them with the patients that we’re serving so that they see what we’re doing. And that – and a lot of companies say that, but what I hear from people we’ve hired is we actually mean it. And so I think that’s an important piece of what we do.
So a long way of saying, it will cost us more to get the right talent but that’s the global environment. It’s not going to break the bank. We will continue to make sure we have the right skills. But as I tell people when I interview them, because when I’m interviewing people, if a recruiter sends me somebody that doesn’t have the skills, they won’t be used again, right? That’s your ticket to entry. I mean they better have the skills. But what I want to know are, are they good people? Are they people that can work within our culture and live the culture. And that’s made a difference, I think, at CSL. So hopefully, I’m not kidding myself, but the numbers and the responses from our employees seem to be pretty positive. So I think we’re on the right track. Look, we’re not perfect. There is no organization that is, but we try hard.
Unidentified Analyst
That’s a great answer. Thanks, Paul. And thanks to that. Of course, very happy to start a company with you any time. If I could quickly ask my second question, with COVID bringing mRNA vaccines to the forefront and then, of course, CSL investing in mRNA facility and competitors doing so, too, as we noted in Victoria, in particular, what are your thoughts on this change to the vaccine technology just at a high level? And obviously, it assumes will lead to some higher margin growth. But what about the regulatory changes that mean to accompany this? How long do you see this playing out over it, assuming it won’t be an instant change and years to ramp up to peak sales with new technologies? Just general thoughts, I guess.
Paul Perreault
Thanks, David. Look, I think it will take time. There is no burning platform to have an mRNA flu vaccine, right? There is plenty of vaccine available today. We’re making more. We can still make it. And there is no emergency use authorization that’s going to be needed just because it says mRNA in front of it, right? So I think that as we go forward, the mRNA technology is quite promising, I think, for a number of areas, including therapeutics. But there is not going to be just because it says mRNA that everybody is going to get it through without doing the hard yards. This is going to take your normal process of clinical development, clinical trials, data analysis without any fast-track approvals just because of the technology platform. COVID was an impetus for quick approvals with a lot of data. So it’s not done without the right data, but it was an emergency approval. Going through that process again, when you don’t have that really spark that you need to deliver billions of doses to the world is going to take more time. And so what you’re looking for, again, is differentiation. We’ve seen the issue with mRNA in its current state, which is the first state of mRNA, where you have issues with dose, you have issues with stability. You have issues with distribution and cold chain. And those need to be solved. And so it’s going to take a while for us to get to the next generation, which is what we’re working on in the self-amplifying space to actually reduce dosing so that you don’t have to put as much antigen in. And Lord knows if you want to do a flu vaccine and you have four antigens, not just one spike virus that you’re trying to inject into people, that you want to make sure that you’re not going to have the reactivity that you’ve seen in the arms of people with the current with COVID vaccine because of the dose with one particular virus.
And if you’re going to do a combo vaccine, the FDA and other regulators around the world for the last 30 years have not been fans of combination therapies because it’s very difficult to tell, and especially with COVID and flu, for instance, the symptoms are very similar. So how are you going to show the efficacy, okay? So you might get it approved with immunogenetic response and immunogenicity, but it’s going to take some time to sort through the variance. And then is it seasonal the same way as flu, is it at the same time? And then you have the durability of the vaccine, right? Because we are on our what, fifth booster now in about 1.5 years, I don’t think people want more than 1 flu shot in a year. So I think we’re going to have to – there is a lot of work left to go. It used to be – this used to be called the art of medicine, and we’re very smart people these days, but there is still a lot of art left in some of this that we have to work through. So that would be my overall comment.
Mark Dehring
Thank you for your question, David. Ladies and gentlemen, more broadly, thank you for your interest in CSL. I’ll now draw the meeting to a close. Goodbye.
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