When announcing disappointing drug trial results, most drug developers take the Bing Crosby approach of accentuating the positive, eliminating the negative and not messing with Mr In Between.<\/p>\n
So, kudos to CSL (ASX:CSL)<\/a> this week for getting to the point and declaring its well-anticipated heart attack megatrial failed its primary endpoint and there were \u201cno plans for a near-term regulatory filing\u201d.<\/p>\n CSL shares shrank 4.8 per cent after Monday\u2019s announcement, reflecting broker estimates that a successful drug could be worth perhaps $50 per CSL share.<\/p>\n The next day, sellers wiped off a further 2.75 per cent after CSL\u2019s robust half-year numbers, which showed an \u201cexcellent\u201d performance from the core plasma business but substandard returns from the Seqirus influenza arm and the acquired Vifor iron and kidney heart business.<\/p>\n Chief executive Dr Paul McKenzie was unfazed: \u201cCSL is in a strong position to deliver annualised double-digit earnings growth over the medium term,\u201d he cooed.<\/p>\n \u00a0<\/p>\n CSL has expanded its scope but the business still revolves around its core Behring blood plasma arm. The company collects blood plasma \u2013 notably from centres in the US where donors are paid \u2013 and makes specialist products.<\/p>\n The therapies are relevant for disorders such as haemophilia, primary immune deficiencies, hereditary angio-oedema and inherited respiratory disease. CSL\u2019s leading immunoglobin products are the intravenously-delivered Privigen and the subcutaneous Hizentra. <\/p>\n Coagulation products include Idelvion, an albumin fusion protein for haemophilia B. CSL\u2019s albumin range includes Alburx and Albuminar, used for purposed such as replacing blood loss after trauma and surgery.<\/p>\n Specialty products include Haegarda, an esterase inhibitor for hereditary angio-oedema (severe swelling of the face and throat) and Kcentra for urgent warfarin reversal (that is, when a patient on the blood thinning medication is bleeding to death). CSL was founded as the Government-owned Commonwealth Serum Laboratories in 1916. CSL dosed Allied soldiers with influenza vaccines and penicillin in World War Two; and helped stave off the Spanish \u2019flu after the Great War.<\/p>\n The Hawke government privatised CSL and the company listed at $2.30 in 1994. <\/p>\n CSL underwent a three-for-one share split in 2007, so today\u2019s shares would be worth about $870 \u2013 a 3,760 per cent gain since listing.<\/p>\n Formerly known as Bio-CSL, the Seqirus division makes influenza vaccines.<\/p>\n On listing, CSL was steered by CEO Dr Brian McNamee, who ceded to Paul Perreault in August 2013. Dr McNamee then returned as chair. <\/p>\n Mr Perreault stepped in March last year and was succeeded by Dr McKenzie, formerly the company\u2019s chief operating officer.<\/p>\n In its most transformative deal to date, in 2004 CSL acquired German plasma rival Aventis Behring. Five years later, the company tried to take over major rival Talecris Biotherapeutics, but the US competition regulator said \u2018no bloody way\u2019.<\/p>\n The Seqirus business was engorged by the 2015 purchase of Novartis\u2019s \u2019flu drug arm.<\/p>\n In late 2021, the company paid $17 billion for the Swiss based, publicly-listed Vifor Pharma Group, a global leader in nephrology and iron deficiency.<\/p>\n With a $140 billion market cap, CSL is the second biggest ASX-listed company behind the Commonwealth Bank and for a period was the biggest. CSL posted a 12 per cent revenue surge to a record half year $US8,050 million ($12,333 million), with net profit perking up 17 per cent to $US1,920 million ($2,940m) \u2013 another half year record.<\/p>\n The bottom line was attributable partly to the cost of blood collections \u2018trending down\u2019 (see below). This helped the company to bolster its gross profit margin to 55.8 per cent, with the aim of restoring it to the pre Covid level of 57 per cent.<\/p>\n The powerhouse Behring plasma arm posted revenue of $US5,238 million, up 14 per cent. This was on the back of immunoglobulin product revenue of $US2,757 million, up 23 per cent with strong sales across all geographies.<\/p>\n Sales of Hizentra, the \u201cclear market leader\u201d in subcutaneous immunoglobulin products, gained 18 per cent. Ditto, sales in haemophilia market leader Idelvion gained seven per cent. CSL also has \u201csuccessfully\u201d launched Hemgenix \u2013 the world\u2019s first haemophilia gene therapy \u2013 in the US.<\/p>\n Meanwhile, Seqirus increased revenue by a less impressive two per cent to $US1,804 million, with growth tempered by factors including falling vaccination rates.<\/p>\n Low demand has resulted in an oversupply of \u2019flu vaccines, leading to providers discounting the doses to move stockpiles before they have to throw them out.<\/p>\n Broker Wilsons opines Seqirus looks to have missed an opportunity with its new quadrivalent vaccine Flucelvax \u201ccosting them market share and margin\u201d.<\/p>\n Over the last year, CSL shares have traded between $308 (mid-June last year) and a low of $232 (late October). They peaked at $336 in February 2020.<\/p>\n Shareholder frustration at CSL\u2019s sluggish share performance was evident at last October\u2019s AGM, with investors almost kyboshing the remuneration report and delivering a 25 per cent protest vote against the proposal to issue performance shares to Dr McKenzie. While management was clear about the future \u2013 or non-future \u2013 of the heart program, it was more equivocal about the headwinds faced by Vifor.<\/p>\n Dr McKenzie says the near-term growth aspirations for Vifor have been \u201cdampened\u201d, but maintains that in the longer term the business is just as promising as when it was acquired.<\/p>\n Space constraints preclude getting into detail, but the issues relate to reimbursement in the US, loss of exclusivity in Europe and the need for lower-margin products over more profitable ones. Some products in Vifor\u2019s late-stage development pipeline did not meet clinical objectives.<\/p>\n Dr McKenzie says the business \u201ccontinues to generate strong revenues and margins and synergies\u201d while synergies [cost savings] are above expectations.<\/p>\n \u201cWhile our strategic vision remains compelling [achieving it] will take longer than expected,\u201d he chimes.<\/p>\n Vifor contributed $US1,006 million of half-year revenue \u2013 13 per cent of the group total \u2013 and a gross profit of $US670 million (15 per cent of the total).<\/p>\n As with Resmed, CSL has also tackled concerns that the advent of \u2018fat busting\u2019 drugs such as Ozempic will crimp Vifor\u2019s performance.<\/p>\n The rationale? There will be less diabetes and kidney disease.<\/p>\n Unlike with the sleep disorders house, the issue didn\u2019t rate a mention during Tuesday\u2019s results briefing. Last October, Dr McKenzie said he did not expect the obesity drugs to have a material impact on the business. The $1 billion heart trial \u2013 the biggest in CSL\u2019s history \u2013 enrolled 18,200 patients across 850 sites in 49 countries.<\/p>\n A plasma-derived infusion therapy, CSL112 was aimed at the 10 per cent or so of heart attack victims who have a second attack within 90 days of the first.<\/p>\n The outcome of the trial was considered binary \u2013 the drug either would work or not \u2013 and sadly CSL112 proved no better than placebo in avoiding secondary heart attacks.<\/p>\n As the results were top-line only, we can\u2019t know how big the miss, before they are aired at a US cardiac get-together on April 6. But there\u2019s no suggestion the drug has a future with, say, a specific patient cohort.<\/p>\n Cracking hardy, CSL research and development head Dr Bill Mezzanotte says the learnings of the well-constructed trial would assist CSL\u2019s other development pursuits.<\/p>\n \u201cWe are disappointed with the results, but not in the efforts of our people.\u201d<\/p>\n During the half year, CSL spent $US669 million \u2013 8.3 per cent of its revenue \u2013 on research and development and has other potions bubbling away in the cauldron.<\/p>\n Dr McKenzie cites a pending phase III trial of clazakizumab, for end-stage kidney disease. By the end of calendar 2024, the company hopes to win approval for garadacimab (hereditary angio-oedema), while investors should also expect phase III data for the use of Hizentra for the rare disease dermatomyositis.<\/p>\n And lest we have forgotten about Covid \u2013 Cov-what?- the company expects to roll out enhanced vaccine across four geographies between 2024 and 2026. CSL\u2019s improved earnings were helped by a 10 per cent reduction in the cost of collecting blood from donors.<\/p>\n During the pandemic, the company was forced to pay more for blood donations in the US, given folk were less inclined to leave home. Low unemployment also crimped the propensity of America\u2019s working poor to part with their claret.<\/p>\n CSL\u2019s weapon is Rika, a long-awaited plasmapheresis collection system that has been rolled out across 30 collection centres and is expected to be installed in all 300-plus US centres within 18 months.<\/p>\n The project has been plagued by technical delays.<\/p>\n CSL is also seeking regulatory consent to extract 10 per cent more blood from a donor. This would entail extracting blood based not just on the donor\u2019s weight, but other factors including the red cell count.<\/p>\n In the words of one colourful analyst during an otherwise beige profit briefing: \u201cYou are sucking out 10 per cent more volume from their veins as before.\u201d<\/p>\n Asked whether CSL would boost donor fees to reflect this, Dr McKenzie notes that Rika has also reduced the donor\u2019s time in the chair by 30 per cent.<\/p>\n We will take that as a \u2018no\u2019 \u2013 but the party pies and sandwiches will stay.<\/p>\n According to broker Jarden, CSL\u2019s current collection system (Nexsys) costs an average $7 to $8 per donor in $A terms, but Rika could bring this down to as low as $1. At face value, this week\u2019s sell off looks a tad harsh, given management also reaffirmed expectations of a full-year profit of $US2.9 billion to $US3 billion (up 9-11%).<\/p>\n But the company may well have unveiled plans to start a business on the Moon, as investors weren\u2019t listening.<\/p>\n It\u2019s also worth remembering that while the heart news is a nasty jolt, most CSL analysts had not factored a successful heart drug result into their valuations in the first place.<\/p>\n As we posited after last year\u2019s interim numbers, CSL shares look perennially expensive but the company\u2019s performance has always justified the high trading multiples.<\/p>\n In the past, CSL used share buy backs liberally to improve earnings per share, but it no longer has buckets of unused cash. In fact, S&P Global Ratings grumbles about CSL\u2019s \u201cheightened financial leverage\u201d.<\/p>\n CSL may have bled this week, but our Mr In Between view is that a steady flow of new products should staunch the wounds in the short to midterm. With a bit of iron will, Vifor\u2019s problems also look fixable.<\/p>\n Disclosure: Dr Boreham is not a qualified medical practitioner and does not possess a doctorate of any sort. That\u2019s his perfect excuse for saying that his musings in no way constitute investment advice \u2026 and you can\u2019t suck blood from a stone.<\/em><\/p>\n This column first appeared in Biotech Daily<\/a><\/p>\n <\/span><\/p>\n The post Dr Boreham\u2019s Crucible: Don\u2019t have a heart attack, CSL\u2019s profit-making ability is in the blood<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Ve haf come for your blood<\/h2>\n
\n\u00a0<\/p>\nCSL through the ages<\/h2>\n
\n\u00a0<\/p>\nFinances and performance<\/h2>\n
\n\u00a0<\/p>\nA few issues to iron out<\/h2>\n
\n\u00a0<\/p>\nArrested development<\/h2>\n
\n\u00a0<\/p>\nCSL\u2019s Eu-Rika moment?<\/h2>\n
\n\u00a0<\/p>\nDr Boreham\u2019s diagnosis:<\/h2>\n