Why the CSL Limited share price plunged today

Biotech titan CSL Limited (ASX: CSL) reported its full-year 2016 results to the market today. Despite strong growth in a number of its key businesses, profits fell due to one-off costs and losses incurred with the acquisition of the Novartis vaccine business.

Here are the highlights:

  • Revenues rose 9% to $6,129 million
  • Statutory Net Profit After Tax (NPAT) down 11% to $1,242 million ($1,357 million in constant-currency* terms)
  • Underlying NPAT rose 5% to $1,473 million in constant-currency terms
  • Earnings per share of 268 cents, down from 292 cents (due to lower statutory profits)
  • Full year dividends of 126 cents per share, up slightly
  • Debt rose significantly due to the Novartis (Seqirus) acquisition, yet balance sheet remains strong with interest cover** of 32x
  • Cash flows weaker due to acquisitions and higher operating expenses, yet still strong
  • Forecast for 11% NPAT growth in 2017, as well as higher capital expenditure, wider gross margins, and higher effective tax rate

*adjusted for currency impacts

**Earnings Before Interest and Tax (EBIT) divided by interest expenses

So What?

It was a strong year from CSL despite seemingly weaker performance across some fronts, which was mostly due to the unprofitable Seqirus segment. A turnaround is underway and Seqirus is expected to break even in 2018. Adding back losses from Seqirus, one-off expenses, and subtracting a gain on acquisition gives us the underlying profit figure of $1,473 million, which was up 5% as mentioned.

Immunoglobulin sales again carried much of the growth, rising 11% overall. The company’s subcutaneous immunoglobulin product Hizentra was the star, with sales soaring 31% on the back of new patients, selective pharmacy partnerships and an increase in home treatment. Haemophilia sales grew 4%, with Plasma up 14% albeit offset by a decline in Helixate sales, as Helixate is being replaced by new generation therapies (including CSL’s own Afstyla).

Specialty product sales were up 11% on the back of greater sales and marketing efforts as well as new approvals and wider uptake. Albumin sales rose 12% thanks to rising global demand especially from the US and China.

Now What?

A solid performance from CSL, with a significantly increased marketing spend no doubt playing a part. It will be interesting to note in future periods the degree to which increased marketing can grow sales (or, will be required to grow sales), as CSL noted at several points that competition is increasing in some markets.

In the near term investors can look forward to further strong performance in 2017, with management flagging further growth and an additional $500 million share buyback. Over the longer term, CSL’s strong cash generation and massive Research & Development budget will help the company reinvest in itself through marketing, new therapies, and a widening of the potential uses of current therapies.

CSL has a long-term record of value creation and management is both capable and well aligned with shareholders. There’s plenty of growth ahead, CSL can effectively reinvest in itself, and it has highly reliable earnings and a stable balance sheet. However, it is a big business and at 36 times earnings, carries a premium price tag.

Long-term investors looking for a stable blue chip might find it suitable, but for total overall returns in the next few years, CSL might not be the best choice today.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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