Healthcare giant CSL Limited (ASX: CSL) has outlined the effects of transitioning to its own distributor model in China.
Founded in the late 1900s as the Commonwealth Serum Laboratories, ‘CSL’ was sold by the Australian Government to shareholders via the ASX in 1994 at only $2.30 a pop. It used the money to double its size through an international acquisition. CSL is now a global leader in blood plasma vaccines (think: the flu, snake bite anti-venoms, etc.), providing relief for potentially life-threatening medical conditions.
CSL’s Chinese Update
Earlier this year CSL advised that it would be transitioning to its own ‘Good Supply Practice (GSP) License’ in China in FY20, which would enable the company to own and sell products in the domestic Chinese market.
However, this will lead to a number of one-off effects in FY20.
The transition will lead to lower reported albumin sales of approximately $340 million to $370 million. CSL also said that the profit effect will be in line with historical CSL Behring margins. Third, it will have a “more modest” impact on cashflow as CSL continues to collect outstanding receivables from existing distributors. The new model will improve cash collection.
Annual sales of albumin in China are expected to return to a more “normalised” level in FY21 after this change.
CSL has been importing albumin into China for more than 30 years and is now the largest supplier of imported human albumin. In FY18 CSL’s albumin sales in this market were over $500 million.
It takes months for CSL’s product to get from the manufacturing facilities in the USA and Europe to get to China, quality release by Chinese authority, maintenance of contingency stock and distribution to hospitals and pharmacies. CSL will recognise its sales at a later stage in the cycle.
Is CSL A Buy?
The direct trading model will allow CSL to increase its participation in the value chain, remove the reliance on third parties and let CSL work directly with clinicians. There are a lot of benefits to this transition.
The FY20 accounts might look a bit lighter than normal, which is why the CSL share price is down more than 3% in early trade. But, it’s probably good for the long term. CSL is a great business, but I think it will probably trade at a price cheaper than today over the next year or so.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.