The CSL Limited (ASX: CSL) share price will be on watch this morning after the biotherapeutics giant provided an update on the transition to its own Good Supply Practice (GSP) license in China.
What did CSL announce?
When CSL released its half year results in February, it revealed that it would transition to its own GSP license in China in FY 2020. This license will allow CSL to own and sell products in the domestic Chinese market.
This morning the company provided an update on the process and the estimated one-off financial impacts that the transition will have on its results in FY 2020.
The current process.
The release explains that CSL has been importing albumin into China for over three decades and is now the largest supplier of imported human albumin in the country with sales of over $500 million in FY 2018.
These products are currently distributed through a third party, with the sales recorded when product leaves the company's manufacturing facilities in the USA and Europe.
After which, a multi-month supply chain process begins which involves the physical shipment of product to China, quality release by authorities, maintenance of contingency stock, and then the final distribution to the end customer – hospitals and pharmacies.
The new process.
As the company will be handling everything itself in FY 2020, product sales will only be recorded when the product leaves CSL's own GSP distributor in China. This change will not have any impact on the availability of albumin to patients.
Management explained the rationale for the move:
"The direct trading business model enhances CSL's ability to serve patients more effectively in the Chinese market. The license elevates CSL to Tier 1 distributor status affording the Company a number of benefits, including improved participation in the value chain, removing reliance on third parties and importantly allowing CSL to work directly with clinicians. It is also an important step towards CSL's ability to broaden its product offering and aligns our distribution model with other major markets."
The impact.
The transition is expected to result in lower reported albumin sales of approximately $340 million to $370 million in FY 2020, with profits in line with historical CSL Behring margins .
It is expected to have a more modest impact on cashflow as the company continues to collect outstanding receivables from existing distributors and the cash collection cycle is expected to improve under the new model.
Annual sales of albumin in China are forecast to return to a more normalised level in FY 2021, following completion of the transition.
