CompanyOverview - The Company is engaged in the research, development, manufacture, marketing and distribution of biopharmaceutical and allied products. The Company operates in three segments: CSL Behring, Intellectual Property Licensing and Other Human Health. CSL Behring manufactures markets and develops plasma products. Intellectual Property Licensing includes revenue and associated expenses from the licensing of Intellectual Property generated by the Group to unrelated third parties. Other Human Health consists of CSL Bioplasma and CSL Biotherapies. These businesses manufacture and distribute biotherapeutic products. It operates in four geographic areas: Australia, the United States of America, Switzerland, and Germany.

Analysis– The U.S Food and Drug Administration (FDA) announced this month the approval of first long acting recombinant factor VIII (rFVIII) in Biogen Idec’s (NASDAQ: BIIB) ELOCTATE. ELOCTATE will become the first long acting recombinant factor VIII (rFVIII) to be commercialized. The approval is for both adults and children and surprisingly includes a starting prophylactic dose of once every 4 days. This compares to once every 2 days for Baxter’s (NYSE: BAX) Advate with the potential for once every 3 days with pharmacokinetics dosing. This less frequent dosing will be a driver for patient switching but is likely to be a relatively slow burn. The July 2014 launch date for ELOCTATE is in line with our expectations with BAX and CSL on track to become second and third to market with launch dates of 4Q15 and 1H16 respectively. We believe that a shakeup of market shares in the US$5.2bn Hemophilia A space will be beneficial to CSL in that it could break stranglehold that BAX and Bayer currently have on the market. Hemophilia is a market in which CSL has traditionally been under represented, acting only as a distributor of Helixate under a licensing agreement with Bayer. With its own longer-acting rFVIII product, CSL 627, in development and third in line to come to market CSL has an opportunity to increase its footprint and swap distributor margins for manufacturer’s margins.


CSL Product Groupings (Source - Company Reports)

CSL delivered global intravenous immunoglobulin (IVIg) revenue growth of 7.2% in 1H14 within market growth rate guidance of 6-8%. CSL delivered global albumin revenue growth of 6.5% in 1H14 benefitting from restructuring of a Chinese distribution deal. For plasma-derived factor VIII (Pd-VIII), Plasma Protein Therapeutics Association (PPTA) data for 8 months to February 2014 shows 6.9% growth. CSL reported a decline of 5.3% in its pd-coagulation portfolio in 1H14. For rFVIII, PPTA volumes for rFVIII were up 6.8% for the 8-months to February 2014. This compares to CSL’s revenue growth of only 1.2% in 1H14.



Broad geographic sales reach (Source - Company Reports)

The trial and tribulations appear to continue for HYQvia, Baxter’s product that combines plasma-derived 10% immunoglobulin with recombinant human hyaluronidase for subcutaneous (sub-Q) administration in patients with primary immunodeficiency disease as FDA recently requested an additional three months to review safety data and called upon the Blood Products Advisory Committee to discuss the application. While we view continued delays of HyQvia as positive for CSL’s ongoing dominance of the estimated A$1.6bn+ sub-Q space with Hizentra, we believe HyQvia is approvable and view its differentiated therapeutic profile (eg faster infusion rates, fewer injections, improved tolerability and possible health savings) as a competitive threat.


Immunoglobulins Sales ( Source - company Reports)

 
Subcutaneous (sub-Q) Ig- What is it?
 

Subcutaneous (sub-Q) administration of immunoglobulin (Ig) relies on drug delivery via injections under the skin, compared to traditional intravenous administration where Ig is given via a vein. We believe sub-Q differentiation stems from its potential for self-administration in the home setting compared to IVIg, which must be administered by a registered nurse, usually at a hospital. However, the major concern with sub-Q administration is the poor bio-availability (ie ability to enter the systemic circulation). Thus, significant swelling occurs at the site of injection resulting in significantly slower infusion rates and reduced bioavailability of the Ig as it slowly works its way through the tissue. These draw backs ultimately mean patients need to infuse more regularly (one-to-three times per week) at multiple injections sites.

 

Albumin Sales (Source - Company Reports)

CSL is the dominant player in the sub-Q Ig space holding an estimated 65% share of a US$1.6bn+ market. While major competitors entered in 2011 with 10% concentrated products. CSL has had a presence in the US for seven years and in other jurisdictions for more than 10 years with Vivaglobin, a 16% Ig formulation. CSL improved upon its sub-Q franchise with the March 2010 launch of Hizentra, a 20% Ig formulation that offered greater convenience than Vivaglobin (11% shorter infusion times), enhanced flexibility with room temperature stability, improved yields and a higher price point. The benefits of transitioning patients to Hizentra from Vivaglobin are clearly seen in FY11-12 sales growth rates, with sales slowing into FY13 as the mix shift ended.


CSL Behring Product Sales (Source - Company Reports)
 

We estimate the current targeted market of primary immunodeficiency (PID) patients comprises 25% of the total Ig users. Out of these patients, we believe 60% use Ig chronically and 50% of those would be candidates for sub-Q use. Thus, about 7.5% of the total IVIg patient population would be amenable to sub-Q therapy. Given an estimated 123 tonnes of Ig solid in 2014, split between the US and ROW (45/55), and Hizentra pricing we estimate global market at US$1.6bn growing toUS$2.3bn by 2019.

 

CSL Daily Chart (Source - Thomson Reuters)

CSL Behring sales of US$2.4 billion grew 6% in constant currency terms when compared to the prior comparable period. Immunoglobulin, Albumin and specialty products sales showed strong sales growth during the first half. Haemophilia product sales of US$550 million declined 4% in constant currency terms. Humate sales in the U.S. were strong arising from increased usage in surgery. However, this was offset by the conclusion of a number of treatment programs for immune tolerance therapy patients. In addition the timing of plasma derived haemophilia product sales in tender markets can be uneven.
 
CSL holds 30% of the global open market plasma supply. The industry has consolidated to 3 major fractionators controlling 85% of the open market, consolidation appears to have reduced duration and severity of the supply demand cycles. With R&D investment, CSL medium term outlook is encouraging: recombinant portfolio to be commercialized from 2016, with CSL being able to participate in total market value of US$5.2bn. Continued robust global demand growth at high single digit; but for major commercial fractionators demand is more than 10%. Demand for Albumin remains robust.
 
 
We maintain that CSL's track record in unlocking the value in its R&D portfolio is key to valuation upside. We underline CSL’s strength in the form of new product label and geographical extensions as well as positive momentum in its Breakthrough Medicines portfolio with the progression of CSL112 (which has a significant addressable patient population), we retain our BUY recommendation on the stock at the current price of $66.55.

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