Csl Relaxed And Comfortable As Market Debt Jitters Mean Cash Is The Answer
The Age
Thursday February 21, 2008
The biotech company is primed to profit from the rationalisation of the blood plasma industry.
IT'S trite but true that in a market beset by debt concerns, cash is king. Healthscope's decision to sell out of Symbion Health yesterday instead of trying to continue leveraging its $315 million stake in the hope of extracting Symbion assets from Symbion's new owner, Ed Bateman's Primary, was one reminder of that. Market-shaking reports late in the day that private equity firm Kohlberg Kravis Roberts' listed affiliate, KKR Financial, was in restructuring talks after postponing the repayment of billions of dollars in debt were another. But CSL's Brian McNamee is relaxed. The business he runs has a solid defence against sick markets - sick people.Sharemarket shocks come and go, and the subprime one is a doozy, but people get sick all the time. After rationalising the blood plasma industry, McNamee's company is in the box seat to help them get better, and profit in the process. CSL and its US competitor, Baxter, have more than half the plasma products market between them, and the glut five years ago that gutted prices and profits on a core plasma product, immunoglobulin, is a distant memory. CSL expanded into the industry in 2000 with its $1 billion acquisition of Switzerland's ZLB group, and helped solve the oversupply problem by rationalising production, notably through the $1 billion takeover of Aventis Behring in 2004.As the CSL chief diplomatically put it yesterday, maintenance of supply and demand is the key to earnings now. In the December half, McNamee got the balance right.CSL's main plasma products unit, CSL Behring, accounted for almost 72% of group revenue after boosting sales by 18% in US dollar terms, and profit margins held up.The group is developing plasma products. A key emerging profit source is the group's new liquid immunoglobulin product Privigen, launched in the US two weeks ago. Production will ramp up this year and wipe out launch costs. By the beginning of next year, Privigen will be a new profit centre.But the cash flow from CSL Behring is generally underwriting research and development, and the big dividend this year comes from Gardasil, the CSL-developed vaccine that defends against human papillomavirus (HPV) and HPV-related cancers, including cervical cancer.CSL books royalties on Gardasil sales in 93 overseas countries, and direct profits on sales in Australia. In 2006-2007, as Gardasil was taking off, royalties were $86 million, and Australian sales were $100 million. Royalties will be more like $163 million this year, including $81 million in the December half, and Australian sales will be about $200 million, including $143 million in the December half, when "catch-up" vaccination programs for older girls and women peaked.The key with products such as Gardasil is that they are expensive to develop, but are high-margin for CSL once they are in the market. The royalties in particular flow straight down to CSL's profit line, which rose by 28% to $573 million before interest, depreciation and tax, and by 36% to $345 million after those charges.At the group's annual meeting in October, shareholders were told that previously expected earnings for 2007-08 of between $670 million and $700 million could be cut by $65 million by exchange rate movements, notably the US dollar's decline.Yesterday, McNamee maintained guidance on a $65 million to $70 million forex hit. But he also upgraded full-year earnings guidance to between $670 million and $690 million. In effect, the headwinds created by the exchange rate shifts have been neutralised by CSL's accelerating earnings momentum.CSL has another product on the horizon beyond Privigen - an influenza vaccine that received US marketing approval in October and is now ramping up to production.But the sum of all the parts revealed yesterday is that McNamee's outfit is already awash with cash. For investors, the unanswered question is what the group will do with it.CSL pulled its interest-bearing debt down from $1007 million to $992 million during the December half. That load was easily supported by shareholders' equity of just over $1 billion, reserves of $114 million and retained earnings of almost $1.7 billion. Net cash from operations was almost $293 million in the December half, and is expected to be between $620 million and $630 million for the year. Debt servicing costs are being covered a luxurious 43 times by earnings.When CSL reported its full-year result in August, it foreshadowed that it would use debt and some of the cash it is throwing off to fund the repurchase of 4.5% of its issued capital. But McNamee has not pulled the trigger on the buyback, and says that CSL is keeping its options open. It can use its excess balance sheet capacity and cash to fund acquisitions, or return money to shareholders. Right now, there are no compelling acquisitions in sight, McNamee says - but because CSL is essentially untouched by the credit crisis and the debt servicing problems it can and will cause, it is able to wait and see whether this tough market throws some up.Over at Healthscope, CEO Bruce Dixon saw no sign that a deal to buy Symbion's Victorian pathology assets it could live with was in sight. He decided to sell, reduce Healthscope's gearing, and wait.Bateman might still sell to Dixon. But he could focus on the sale of Symbion's consumer and pharmacy divisions to private equity firms Archer and Ironbridge first.mmaiden@theage.com.au
© 2008 The Age
