CSL Ltd (ASX: CSL)

CSL Ltd (CSL) is a global company that develops and manufactures biopharmaceutical products mainly derived from blood plasma. It also develops and manufactures influenza vaccines. CSL’s key markets are the United States (48 per cent of revenue) and Europe (25 per cent of revenue), CSL’s market capitalisation is around $A139 billion and CSL is the largest company listed on the ASX.

 

CSL has been one of the strongest performing Australian companies since its public listing on the ASX in 1994. For example, the average annual growth in CSL’s share price has been over 25 per cent per annum since being publicly listed in 1994. Currently, CSL is ranked number 1 in global plasma therapies (a $US30 billion global industry and CSL has only two other global competitors) and number 2 in influenza vaccines (a $US6 billion global industry).

How is CSL performing in this economic environment?

CSL announced on 9 April 2020 an update on how COVID-19 is affecting the company’s operations. The most significant announcement is that CSL reaffirmed its profit guidance for FY20. FY20 profit guidance remains approximately US$2,110 million to US$2.170 million in constant currency terms. CSL notes that if exchange rates remain unchanged for the remainder of FY20, then this lowers this guidance by around US$100 million. In addition, CSL announced that the company has a strong balance sheet with approximately $1.1 billion available liquidity.

Regarding CSL operations, CSL management notes that plasma collections is expected to be impacted due to COVID-19 conditions.

However, in the current business environment, there is very strong demand for influenza vaccines and requests for IVIG has been elevated. There have been no interruptions in to CSL supply chain, and the Wuhan facility operations have recommenced.

What is the outlook for CSL?

The short-term and long-term outlook for CSL is positive. In the short-term, CSL has announced that FY20 profit guidance remains unchanged in constant currency terms (unlike several blue chips ASX listed stocks), and several of the company’s products will see an increase in demand to help battle COVID-19.

Looking forward over the medium to long-term the outlook for CSL is positive.

CSL has achieved economies of scale and has a very strong competitive position in both the plasma and influenza vaccine markets. Additionally, both industries have very high barriers of entry, reducing the likelihood of further competition in the future. An example of CSL’s competitive position is that it is the most efficient in the United States market at collecting plasma which enables it to keep its costs at industry best practice.

CSL is expanding production facilities located at Broadmeadows in Victoria and Kankakee in the United States as well as elsewhere. The Broadmeadows facility is expected to produce therapies with an estimated annual market value of A$850 million by 2026.

This expansion in production reflects growing demand partly stemming from the aging population and a growing proportion of the population having access to high technology medicine.

Cochlear Limited (ASX: COH)

Cochlear Limited (Cochlear) is a medical device company that designs, manufactures and supplies implantable hearing solutions. Cochlear has provided more than 550,000 implantable devices, helping people of all ages to lead full active lives. Cochlear has a market capitalisation of A$12.4 billion.

How is Cochlear performing in this economic environment?

Due to the spread of COVID-19, a growing number of health authorities are either recommending or enforcing elective surgery deferrals. This is resulting in substantial short-term negative impact on the number of implant surgeries undertaken. In mid-March, the US Surgeon General urged hospitals and healthcare establishments to consider suspending surgical procedures in order to reduce the strain on the healthcare system until the rate of infection of COVID-19 is under control. Cochlear expects these actions from authorities will impact surgeries in major markets, particularly in the US and Western Europe. However, Cochlear expects many of the delayed surgeries to be recommended once hospitals resume normal operations.

Cochlear is not able to provide earnings outlook and as a result Cochlear has withdrawn its earnings guidance for FY20.

In response to this challenging economic environment, Cochlear announced on 25 March 2020 a capital raising to enhance liquidity. The capital raising consisted of a A$800 million Institutional Placement and a non-underwritten Share Purchase Plan. Cochlear has obtained approved for an additional A$150 million bank facility from an existing lender and has suspended its dividend until trading conditions improve.

What is the outlook for Cochlear?

The short-term outlook for Cochlear is unfavourable. This is due to the significant impact COVID-19 is having on Cochlear business activities.
However, the long-term outlook for Cochlear remains positive. Cochlear is a global leader in hearing solutions that has a competitive position in several markets globally. Cochlear has an estimated 60% of global market share and in excess of 600,000 implants sold over the last 40 years. It is expected that most of the deferred surgeries will be recovered when it is safe to do so. After COVID-19 is contained, Cochlear expects strong growth in sales of cochlear implant units in developed markets driven by the recent launch of the Nucleus Profile Plus Series Cochlear implant. Cochlear also expects to release the new osseointegrated steady-state implant (OSIA) product later in FY20 to extend the Acoustics product portfolio.

Overall thoughts

CSL and Cochlear have both performed very well over a long period of time. Both companies have an international competitive advantage and are the leading global company in their field. Investors that want exposer to the health care industry over the long term could consider both CSL and Cochlear.


 

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This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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May 20, 2020