We have reflected on CSL’s (ASX:CSL) soft interim plasma result and temper our view. Immunoglobulin, or lg, sales, which made 57% of plasma sales, fell 6% year on year in constant currency. The former CEO hadn’t executed as hoped, with plasma margins up just 10 basis points to 51%.

Why it matters: We see current headwinds being more structural and cut our midcycle EBIT forecast by 20% on lowering our plasma gross margin to 52% from 58%. We now expect minimal gross margin expansion as we think most cost savings will be offset by price competition on industry efficiency gains.

  • We lower our midcycle Ig sales growth to 5% from 7%, assuming minimal price rises. With competitors willing to sign lower-margin contracts and rolling out efficiency initiatives, we think CSL would need to be more flexible on pricing for competitive tender bidding to maintain share.
  • While CSL still targets long-term plasma gross margins rising to pre-covid levels of 57%, we see price competition and cost inflation limiting the recovery to 52% by midcycle. Despite these headwinds, we expect modest overall gross margin expansion on mix shift, efficiency, and fixed-cost leverage.

The bottom line: We cut our fair value estimate for narrow-moat CSL by 22% to $210 due to our plasma earnings downgrades. However, shares are undervalued. Despite fiercer competition, we think we are more optimistic than the market on Ig demand and plasma margin resilience.

  • All else equal, we would have to assume flat Ig sales and a midcycle plasma gross margin of 45% to justify the share price. We think this is unrealistic with solid improvement on second-half fiscal 2025 in both Ig sales growth and plasma margins, signaling green shoots.
  • We forecast plasma gross margins to lift a modest 100 basis points by fiscal 2035 from our estimated fiscal 2026 levels. Most of this uplift is from efficiency initiatives enabling faster and greater yield, and rationalization of high-cost collection centers, offsetting pricing headwinds.

CSL’s Plasma division facing stronger competition

CSL is one of three Tier 1 plasma therapy companies that benefit from an oligopoly in a highly consolidated market. All the players are vertically integrated as plasma sourcing is a key constraint in production. The plasma sourcing market is currently largely balanced with demand. CSL is well positioned, having rationalized its plasma collection centers.

One major threat to plasma products is recombinant products. Recombinants are quickly replacing plasma products in haemophilia treatment despite being more expensive. CSL has an excellent R&D track record and has developed recombinant products for haemophilia. However, we expect modest revenue growth in the haemophilia segment based on competitor Roche’s recombinant Hemlibra.

Immunoglobulin product sales are key to CSL. The use of immunoglobulins is currently growing due to improved diagnosis, rising affordability, and gaining approval for increased indications. CSL and competitors are pursuing R&D in Fc receptor-targeting therapy to treat autoimmune diseases.

However, gene therapy represents the biggest risk to the plasma industry as it aims to cure rather than treat diseases. While the potentially prohibitive cost may result in slow adoption, CSL has strategically expanded its scope via the acquisition of Calimmune in fiscal 2018 and licensing a late-stage Haemophilia B gene therapy, Hemgenix, from UniQure in fiscal 2020.

CSL is the second largest influenza vaccine manufacturer, behind Sanofi, and is at the forefront of changes in influenza vaccines, where manufacturing is shifting from egg-based to cell-based culturing.

CSL also operates an iron deficiency and nephrology business where the strategy is to increase global access to therapies, receive label expansions, and defend against generic competition.

The company evaluates R&D spend based on the commercial outlook. The strategy for CSL Behring has been to target rare diseases, a typically low-volume, high-price, and high-margin business. There is little reimbursement risk in this area or in the vaccine business, Seqirus.

Bulls Say

  • CSL is investing in plasma yield initiatives, leaving it well positioned to take advantage of growth opportunities in the key immunoglobulins market.
  • The acquisition of Calimmune’s gene therapy platform in fiscal 2018 and UniQure’s late stage haemophilia B gene therapy candidate in fiscal 2020 will help defend against emerging competition.
  • CSL has a strong R&D track record and the ongoing rate of investment is ahead of major competitors.

Bears Say

  • Areas of the plasma industry could be replaced by newer therapies, which would leave CSL overinvested in plasma collection and fractionation capacity that will be hard to repurpose.
  • Segments such as haemophilia face competitive pressure from Roche’s Hemlibra that offer more convenient delivery.
  • The R&D pipeline has a highly variable range of outcomes and R&D spending could ultimately amount to nothing.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.