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CSL shares on offer at a discount ahead of acquisition

Annabelle Dickson  |  20 Dec 2021Text size  Decrease  Increase  |  
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Shares in homegrown biotech giant CSL are on offer at a discount to fair value as the company taps investors for money to fund the acquisition of a Swiss pharmaceutical company, says Morningstar.

CSL (ASX: CSL) is expanding its reach with the US$11.7 billion acquisition of pharmaceutical company Vifor Pharma (VIFIN) which specialises in iron deficiency and renal disease. The global leader in plasma therapies is raising US$4.5 billion with an underwritten share placement open to institutional investors, US$6 billion from a new debt facility and $750 million from a share purchase plan.

While Morningstar equity analyst Shane Ponraj views the transaction and equity raise as largely “value-neutral”, he says long-term investors who opt into the share purchase plan are set to receive stock at a discount to fair value.

New shares will be issued at the lower of the placement price of $273 or a 2% discount to the five-day volume-weighted average price up to the close of the retail offer.

The price is roughly 6% below Ponraj’s upgraded fair value of $290. He raised the fair value 4% last Thursday as the rising US dollar boosts the value of CSL’s overseas earnings. The firm earnt half of its revenue in the US last financial year.

“Despite CSL shares currently trading at the placement price, long-term investors participating in the share purchase plan, or SPP, receive an attractive discount to our updated fair value estimate of about 6%,” he says.

The $750 million share purchase plan opens to Australian and New Zealand CSL shareholders on 21 December and closes 7 February. The US$4.5 billion institutional share placement completed last Thursday.

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CSL shares closed Monday at $273.76, down from a 52-week high of $319.78.

The equity raise adds 25.8 million shares or roughly 6% of existing shares. Morningstar forecasts 2023 NPATA per share to increase by 13% which is broadly in line with CSL’s guidance for earnings per share accretion.

“Our forecast EPS for fiscal years 2023 to 2031 also increases by an average 5%, but we estimate the transaction's overall impact to valuation is negligible due to the consideration being paid,” Ponraj says.

The acquisition, which is expected to complete in mid-2022, is subject to regulatory approvals and a minimum Vifor shareholder acceptance rate of 80%. Morningstar believes the deal is likely given Vifor’s largest shareholder, Patinex, has agreed to sell its shares.

"Strategically sound" acquisition

CSL’s acquisition of Vifor Pharma gives exposure to the renal market and provides access to a new set of customers from Vifor Fresenius' large global network of physicians and dialysis centres.

Morningstar views the acquisition as strategically sound given the global prevalence of chronic kidney disease has grown at a compound annual growth rate of 8% over the last decade.

“According to a variety of sources quoted by CSL, the market is estimated to grow at a 12% CAGR to US$25 billion by 2026 from US$13 billion in 2020 driven by aging populations and increased prevalence of chronic kidney disease, or CKD, risk factors such as diabetes and heart disease,” Ponraj says.

In the last financial year, Vifor’s revenue was roughly equally split between its product offering for iron deficiency and renal disease.

It is set to release four approved renal disease products in 2022. One of the products, Korsuva, is currently the only approved therapy for a skin disease brought on by chronic kidney disease.

The acquisition will add a material chunk to CSL's bottom line. In fiscal 2021 Vifor recorded US$1.9 billion in revenue and EBITDA of US$634 which is equivalent to 18% and 17% of CSL’s 2021 group revenue and earnings, respectively.

Vifor currently receives a third of its revenue from iron deficiency therapy called Ferinject. The patent is due to expire in 2025 but Morningstar foresees limited impact.

“We currently don't expect significant pricing pressure from generics when patents expire, as manufacturing of Ferinject would be difficult to replicate,” Ponraj says.

Morningstar also estimates US$75 million in annual cost savings through administration and procurement benefits over the next three years.

is a business and finance reporter for Morningstar

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