Marko Geber
Elevator Pitch
I rate CSL Limited’s (OTCPK:CSLLY) [CSL:AU] stock as a Buy.
In my prior update for CSL Limited written on August 22, 2022, I touched on the company’s full-year fiscal 2023 (YE June 30) guidance.
The focus of my latest write-up is CSL Limited’s R&D (Research & Development) efforts and recent M&A (Mergers & Acquisitions) transaction. After assessing CSL Limited’s R&D pipeline and the merits of its latest acquisition, I have a favorable view of the company’s business outlook. This leads me to raise my rating for CSL Limited from a Hold previously to a Buy now.
R&D Efforts
On November 4, 2022, CSL Limited hosted its yearly R&D investor briefing.
The company disclosed a number of metrics relating to its R&D efforts at its early-November investor call, and I am of the view that these metrics offer a good indication of CSL Limited’s future growth prospects.
Firstly, CSL Limited has been extremely efficient and effective with its investments in R&D.
Between fiscal 2017 and fiscal 2022, CSL Limited has allocated a reasonable amount of capital to R&D investments. Specifically, R&D expenses accounted for around 10%-11% of the company’s worldwide sales during this period. If one excludes FY 2022’s financial performance which was negatively affected by a decline in plasma collections due to the pandemic, CSL Limited managed to achieve a healthy +10.5% revenue CAGR for the FY 2017-FY 2021 period, even though it didn’t spend very heavily on R&D.
CSL Limited emphasized at the R&D investor briefing that it is “spending far less (on R&D) with a healthy rate of return on investment” thanks to the application of “rigorous organizational efficiency to our market development and lifecycle management spend.” I certainly agree with CSL Limited’s management on this point, taking into account the company’s R&D-to-revenue ratio and top line CAGR.
Secondly, the company stressed at its recent November 2022 R&D briefing that “at least 10 of the pipeline medicines listed here have the potential, if approved, to be considered standard of care for their intended patient population.”
In other words, CSL Limited is implying that around a fifth of its R&D pipeline could potentially be “successful”, which is a significant figure.
Thirdly, CSL Limited is focusing its R&D efforts in areas which are growing. One good example is the global targeted protein therapeutic market, and more specifically the immunoglobulin segment.
The worldwide targeted protein therapeutic market grew by an annualized growth rate of +8% between 2017 and 2022 to approximately $38 billion. Specifically, the immunoglobulin segment’s market size increased at an even faster CAGR of +14% to roughly $16 billion over the same time frame. At its R&D investor briefing, CSL Limited highlighted that its key product for the immunoglobulin segment, HIZENTRA, has had the leading market share in the area of subcutaneous immunoglobulin utilization for over a decade. Sustained R&D efforts should allow CSL Limited to maintain its status as the leading player in this segment.
In the next section, I discuss about CSL Limited’s latest acquisition.
M&A Deal
Prior to the recent R&D investor briefing, CSL Limited provided an update on its recently completed M&A deal with an investor call on October 17, 2022.
I have previously noted in my late-August 2022 write-up for CSL that “I choose to reserve judgment on the Vifor acquisition till the point” that further “information (October 2022 management briefing for Vifor) on the transaction” is available. CSL Limited had earlier concluded the purchase of a company in the pharmaceuticals space, Vifor Pharma AG or Vifor in early-August.
CSL Limited’s management comments and disclosures at its mid-October investor call give me the confidence that the company made the right decision to acquire Vifor.
The company guided that it expects Vifor’s top line to expand by a reasonably decent +10% CAGR for the intermediate term at the very least. Notably, CSL Limited’s expectations of a double-digit annualized revenue growth rate for Vifor isn’t dependent on any specific segment outperforming in a big way. Instead, CSL Limited sees all three of Vifor’s product segments or therapeutic areas, namely iron, dialysis, nephrology, and iron, to achieve yearly sales growth exceeding +10%.
If I had to pick one specific therapeutic area to discuss, it will be dialysis. Specifically, Korsuva, Vifor’s new product introduced to the market this year, seems to have substantial growth potential. CSL Limited emphasized at the company’s October 17 investor briefing that Korsuva is “the first and only approved therapy for the treatment of moderate to severe pruritus associated with chronic kidney disease.” It is noteworthy that pruritus has a global prevalence rate that is as high as 40%, but Vifor’s Korsuva is now the sole product that can treat this disease.
Concluding Thoughts
My rating for CSL Limited now is a Buy. I have a positive opinion regarding the company’s future growth prospects, following my evaluation of its R&D efforts and latest M&A transaction. Also, CSL Limited’s valuations aren’t particularly demanding based on a comparison of historical valuations. According to S&P Capital IQ’s valuation data, CSL Limited currently trades at a consensus forward next twelve months’ normalized P/E multiple of 36.5 times, which is -8% below its three-year average P/E of 39.7 times.
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