The CSL Limited (ASX: CSL) share price soared to an all-time high of $242.10 this month after stellar full-year results, but has the biotech behemoth reached a share price ceiling?
Background on CSL
CSL has outperformed the S&P/ASX 200 (INDEXASX: XJO) by 4.6% year-to-date, gaining 24.6%. Looking at its performance across the past 5 years, the CSL share price has gained 165% since the start of 2015.
The CSL market capitalisation now sits at a staggering $105 billion, with net assets of US$5,251 million as of full-year 2019. Its market capitalisation is nearly eight times the size of its nearest ASX biotech and healthcare rivals – Sonic Healthcare Limited (ASX: SHL), Ramsay Health Limited (ASX: RHC) and Cochlear Limited (ASX: COH).
Not surprisingly, Ernst & Young found that CSL represented 92% of all Australian biotech industry revenues in 2015.
CSL's full-year 2019 earnings results
CSL's total revenue was US$8,757 million, up 11% at constant currency and net profit after tax (NPAT) of US$1,919 million, up a hefty 17%.
The results were highly positive, meeting CSL's already sizeable guidance expectations.
Since FY15, CSL's NPAT has grown by 46.1% and its total operating revenue has risen by 56%.
Overweight or overrated?
CSL's price-to-earnings (P/E) ratio is a somewhat high 38, which is higher than the likes of Sonic (22.6) and Ramsay (24.6). Yet CSL's P/E is lower than sector competitors ResMed Inc (ASX: RMD) (48.1) and Cochlear (44.1).
Not only that, CSL's FY19 earnings-per-share (EPS) grew 16% at constant currency, whereas ResMed's adjusted EPS only grew 9% over the last five years. It seems investors think the P/E premium is justified for a market leader with a strong balance sheet and earnings growth.
Can CSL's growth continue?
Strong product sales
CSL's Behring arm accounts for 85% of its revenue by specialising in therapies for rare and serious diseases. This expertise differentiates CSL's main products and acts as a moat against rivals.
Indeed, its core products Privigen, Hizentra, and Albumin went up 23%, 22%, and 15%, respectively, in FY19. Not only that, CSL's transformational therapies for hereditary angioedema and haemophilia B saw staggering growth of 61% and 40%, respectively.
Additionally, CSL's recently acquired Seqirus subsidiary reported last October that its influenza vaccine was 36% more effective than standard vaccines in preventing influenza-related illnesses during the 2017/18 influenza season.
Further positive developments include CSL wholly acquiring a Chinese pharmaceutical company that has a license to buy and sell inventory in China's domestic market. This is great news for CSL, as China's growth pastures are tough to access – just ask Bellamy's Australia Ltd (ASX: BAL).
Boom in biotech sector and rising healthcare spending
The World Health Organization reported that healthcare expenditure accounted for 10% of global GDP and that global healthcare spending is rising 5% annually.
In line with this, reports by the likes of McKell Institute suggest that Australia's biotech sector is expected to grow at an annual rate of 4.4% at least until 2021.
However, CSL is an international enterprise, and the same report found that the global biotech sector is growing at 10% a year.
Given CSL has invested US$3.3 billion in R&D over the last five years and has already registered 24 biotech products this year, it has demonstrated that it is well-placed to meet rising healthcare demand.
Forecasts and estimates
Looking forward, CSL's CEO Paul Perreault reported that "CSL's net profit after tax for FY20 is anticipated to be in the range of approximately $2,050 million to $2,110 million at constant currency, representing growth over FY19 of approximately 7–10%."
Of 13 analysts profiled by the Wall Street Journal, 7 deemed CSL a buy and the remaining six a hold. No analyst reported CSL a sell. Blackrock Inc and Vanguard Group are both substantial CSL shareholders with 5% voting rights each.
Foolish takeaway
CSL is largely insulated from trade war shocks and economic cycles, making it an appealing alternative to stocks that may toss in the headwinds of US–China trade war and a gloomy economic outlook. Demand for life-saving biotechnology is more inelastic than demand for discretionary products.
In the short-to-medium term, all signs suggest healthcare spending will continue to rise, and medical and biotechnological innovation will only spur that growth.
As a global leader in biotech, CSL has many products in the pipeline and spends heavily on R&D, diluting potential over-reliance on any one product and negating competition threats.
It seems CSL still has enough runway left for share price lift-off.
