CSL Limited (ASX CSL) is a leading biotechnology company that researches, develops and markets across the global market. The business has a broad reach in the biotherapy industry with a differentiated product portfolio and commercial operations in more than 20 countries. The CSL share price has continuously grown in the past few years and reached $198.64 as at 17th July 2018, however, the P/E ratio is also quite high. Are CSL shares still a stock to buy?
About CSL Limited (ASX CSL)
As one of the market dominators in the global biotechnology industry, CSL Limited has a market share of more than 20 per cent in the global market, with a huge market capitalisation of US$88.146 billion.
CSL Limited has a diversified portfolio with products in different areas, including blood plasma derivatives, anti-venom, vaccines, and cell culture reagents that are applied in different medical and genetic research and manufacturing processes.
Dominant Market Position For CSL
CSL Limited is a market leader in the biotechnology industry and in the local market has a massive market capitalisation of $88.148 billion, compared to $1.753 billion of Sirtex Medical (ASX SRX), $697 million of Mesoblast (ASX MSB), and $251 million Monash IVF Group (ASX MVF).
As one of the largest manufacturers of blood plasma products in the world, CSL’s market share in the global market has grown to more than 20 per cent, from less than 1 per cent at the time of listing.
After CSL’s acquisition of the Novartis Flu vaccine business in FY15, it has been the second largest influenza manufacturer in the world, with a geographically diversified portfolio of the business in more than 20 countries in the $US4 billion global industry.
In mid-2017, CSL announced the acquisition of 80 per cent equity of Wuhan Zhong Yuan Rui De Biological Products Co. Ltd for US$352 million, a significant plasma-derived supplier in China.
The acquisition provided CSL with a strong foothold to expand its business in China, a rapidly developing plasma market. From 2012 to 2016, the market had grown by more than 15 per cent and had exceeded $3.3 billion.
Potential Future Growth For CSL Expected Via CSL-112
CSL-112 has entered its third phase of clinical trials and, in March this year, CSL Behring announced its first patient enrolment phase of the trial.
Developed to prevent second-time-around heart attacks and stroke after a patient suffers an initial heart attack, CSL-112 is regarded as the “biggest transformative product” for CSL.
CSL-112 would provide a huge growth to CSL’s revenue if the trials prove successful, as the demand for this drug is huge in the global market.
In Australia, about 54,000 people are hospitalised every year due to a heart attack, and the number expands to 750,000 in the United States. A study showed that around 20% of survivors of a heart attack would likely experience a recurrent episode one year after the first event, and the majority of these recurrent events are highly correlated with high rates of mortality.
CSL-112 aims to remove the cholesterol from plaque following a heart attack by stabilising the dangerous plaque lesions, hence reducing the chance of a recurrent event. There has not been a drug that can prevent the recurrent of heart attack within 90 days of the initial event so far.
If the drug is approved, there will be a huge market for it, and CSL is likely to experience significant growth in revenue with the new plasma product. However, it is still questionable whether CSL-112 can pass the trails and the evidence will only be shown once the trial takes place.
Approval Of Hizentra In The US
On 16 March 2018, Hizentra was approved to treat neurological disease by the US government. It is the first and only subcutaneous immunoglobulin for the treatment of chronic inflammatory demyelinating polyneuropathy. As the manufacturer of Hizentra, CSL is likely to expand its sales from operating activities in FY18 and future periods.
Stable Revenue Growth And Cash Position For CSL Shares
CSL has strong financial performance and has grown its revenue steadily in the past five years. In FY15, FY16 and FY17, CSL had a stronger revenue growth compared to prior years, contributed by its business expansion via the acquisition of Novartis Flu vaccine business in China.
CSL shares had a stable cash position in the past five years, with a significant boost in FY17. Operating cash flow had increased by 15.1%, from US$1565.7 million in FY16 to US$1802.3 million in FY17. As a result, cash and cash equivalents rose by 51.7% in FY17.
The stable cash position in the past five years and growth in FY17 provide strong support for CSL’s R&D division to generate future revenue.
High Profitability For CSL In The Future
CSL’s EPS has grown for the past five years, except for the slight drop in FY16.
As of this writing, the CSL share price is quite high at $198.64, and a very high P/E ratio of 39.1, compared to 16.7 in the market. However, the extraordinary growth for such a large company shows investor confidence in its high profitability and future growth.
CSL shares have maintained a strong profit margin over the past five years, with an EBIT margin of 24.37% in FY17, compared to the negative EBIT margin for the peer level.
ASX CSL had stable growth in growth in ROE in the past five years. Its ROE has risen from 40.14% in FY13 to 46.67 in FY17, while the peer median ROE is negative, indicating CSL share’s high profitability.
Potential Future Growth For CSL Share Price
Overall, CSL shares has had strong financial performance in the past few years. Due to CSL’s dominant market position, it was able to dominate and generate huge profits compared to its competitors who have negative profitability.
Although the CSL share price is quite high, it is expected that CSL can further expand its business if CSL-112 can be proved by the trails successfully. The stable cash position would provide strong support for the development of CSL-112 and its R&D division to have a future revenue boom. Even though the CSL share price and P/E is quite high right now, the future prospects for the company justify the price.
Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.