CSL recently hosted a briefing with Gordon Naylor, president of Seqirus, the group’s flu vaccine business. The key message from the briefing was that the flu business remains on track to reach break-even in FY18 as revenue is boosted by the roll-out of higher-value quadrivalent vaccines and operating costs are reduced thanks to in-sourcing of IT and fill and finish services.
Ord Minnett also sees potential for the performance of the Seqirus division to exceed our forecasts this year in light of the relatively strong ‘flu season’ in the US. Management also said a modest lift in flu vaccine prices was expected in FY18, based on early negotiations. As a result, CSL is on track to enjoy a significant uplift in revenue, given the large premium available for quadrivalent vaccines.
Quadrivalent vaccines currently sell for around US$10 compared with US$6 for trivalent versions. This 66% price premium is well above the lift in costs associated by the addition of an extra strain, ensuring much of the benefit flows to the bottom line. CSL also argues that the attractive pricing environment reflects improved pricing dynamics as market concentration has increased.
Turnaround has been supported by significant costs savings. In addition to the strong lift in revenue, the move to a neutral earnings before interest and tax outcome for Seqirus in FY18 will come from a large reduction in costs, as R&D is reduced and the IT and fill & finish services are bought in house. Spending on R&D will decline as trials associated with the group’s range of vaccines naturally wind down.
Our confidence in the near-term outlook has received a further boost from strong quarterly results from competitors to Seqirus, which suggest robust demand conditions have continued into 2017, especially in the US.