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CSL investors had already torched tens of billions of dollars of wealth on the biomedical giant before the year had even started, and a sense of panic must have set in when its chief executive, Dr Paul McKenzie, abruptly resigned the day before its half-year results announcement in February.
How much worse could it get?
Trump’s war on big pharma’s pricing power in the US, and weakness on the vaccine front from COVID fatigue and vaccine scepticism from his health secretary Robert F. Kennedy Jr, had already driven the share price down from $270 to $180.
But the man who orchestrated CSL’s dizzying global success, former chief executive and current chairman Brian McNamee, was on the conference call to calm investor nerves about the abrupt leadership change and show his confidence that its performance would soon be back on track.
“I can assure you, this is still a very strong organisation. It generates very strong cash flows as a business. It has significant unmet medical needs in much of its portfolio,” he told them.
The calm assurance may have fallen a little flat given CSL had just botched the announcement of McKenzie’s abrupt retirement from the group.
A misjudgment of the timing meant the stock was not in a trading halt when the announcement was made. It dropped amid chaotic trading, which added billions of dollars of losses to the tens of billions investors had already absorbed since the cycle of downgrades began in August last year.
Last year, the ASX had effectively extended the market trading window by 10 minutes. It is not something that an $80 billion market colossus should have missed.
On the conference call which followed, McNamee repeatedly mentioned the need for “urgency” as well as the need to find the right CEO for the growth path ahead.
McKenzie – who attempted to address performance issues last year by cutting staff and consolidating its R&D operations – no longer fitted the bill.
“We, in discussion with Paul, recognised he didn’t have the skills that we wanted for the future,” McNamee said.
McNamee sold investors on one saving grace amid the chaos.
CSL would be parachuting a company veteran who helped shape the group into a global giant, Gordon Naylor.
This would ensure the company’s transformation continues with the urgency the board demands while also allowing them the time to find the right replacement, which may not happen until next year.
Naylor and McNamee took every effort to impress on investors that there was no need for concern, even when pressed by an analyst on whether the growth outlook had materially changed.
“Our fundamentals haven’t changed, and I think the outlook for our core products haven’t changed,” McNamee said.
The answer that stands out as ominous in retrospect was Naylor’s response to a question on whether he would be scrutinising its largest business – plasma – which he used to run.
“I think it’s probably a bit too early for me to be doing diagnosis, but I’d just say that we will be looking very closely at all parts of the operation and answering questions like that one.”
The following day, the carnage continued afresh with December half-year results that fell short of market estimates and included $1.5 billion in writedowns.
The stock plunged to an eight-year low of $150 but Naylor and CSL’s new chief financial officer Ken Lim stuck to the growth outlook put in place by their predecessors.
CSL was still expecting revenue growth of 2-3 per cent and underlying earnings growth of around 4 to 7 per cent for the financial year ending this June 30. It implicitly included what Lim described as “an ambitious growth plan” for the current half year.
Analysts were sceptical.
“It faces the daunting prospect of hiring a new CEO to reinvigorate a lacklustre growth outlook in the face of headwinds on multiple fronts,” Bell Potter’s Thomas Wakim said in one of the most critical notes on its downgrade.
It took 90 days for Naylor to finish looking under the hood of the business he had known so well – before retiring in 2019 – and ring the alarm bells.
The big downgrade that the market had feared in February when McKenzie was dumped finally hit this week and sent the stock plunging, taking with it any confidence investors had in the group.
Naylor confirmed there would be no June miracle. Revenue and underlying profit would drop this year, not rise.
“The market was blindsided by full-year guidance well below (consensus) and the headwinds appeared structural,” was the brutal verdict from Morningstar’s Shane Ponraj.
“If there is a silver lining to this dark cloud, it is that CSL is clearing the decks and, importantly, admitting mistakes,” Ponraj said, adding that the massive writedown reflects a “collision with reality.”
What Naylor discovered was that most of CSL’s global business was facing a toxic mix of market softness or increased competition. This included the core business that made the group a global giant – plasma and its related therapy drugs – which generate 70 per cent of its earnings.
One fund manager who requested anonymity to speak freely about CSL’s woes said this third downgrade in less than a year raises questions about the executive team and board: “How well do you know your business?” he asked.
“I don’t think they know what’s going on.”
CSL has been caught napping on its core plasma business in its largest market, the US, losing market share to rivals like Grifols, and it is taking a $US300 million hit to “normalise” inventory levels in that market.
Meanwhile in China, CSL’s albumin business – a plasma-based treatment – is facing hospital budget restrictions that are lowering price and demand and warranted another $US200 million hit.
There was also a $5 billion writedown in the value of its Vifor business, which specialises in treating iron deficiency and kidney-related diseases.
CSL acquired the group for $16 billion cash in 2022 but clearly overpaid for a business that is now being eaten by generic rivals for its iron-based products in both Europe and the US.
The only business to emerge unscathed was the vaccine business, Seqirus, which had its spin-off plans postponed by a shock fall in its US business last year which kicked off CSL’s downgrades.
Brokers slashed earnings and revenue guidance for the coming years with some concerned about the growth profile for the business, including plasma.
Anja Samardzic, a portfolio manager at AllianceBernstein with an academic background in medical science sums it up neatly: “I think the market was quite concerned that plasma market growth had fallen away, and so that there was something wrong with plasma market fundamentals.”
She thinks the problem is the complacency that set in within CSL, which for so long had been the dominant force in a growing market and was unable to respond when traditionally weak rivals decided to aggressively target market share.
She says all the data points to growth continuing in the mid to high single digits, as CSL has said. And the group remains the lowest-cost, highest-quality player.
“They just need to turn the commercial execution around a bit. They don’t have to grow here. They just have to stop losing it,” she says.
‘If there is a silver lining to this dark cloud, it is that CSL is clearing the decks and, importantly, admitting mistakes.’
Morningstar’s Shane PonrajCSL’s valuation is now trading at a significant discount to its peers and the ASX200, but some analysts see this as warranted given the issues around management credibility and performance.
“We think a discount is warranted for CSL considering the declining underlying earnings outlook across FY26-27, the lack of stable management, and a series of credibility hits following several disappointing results/trading updates,” Bell Potter’s Wakim said.
The solace for investors is that McNamee is right about one thing, the business and the industry outlook are still intact. Earnings have not actually crumpled despite the massive loss of shareholder wealth, which reached $105 billion over the last two years from peak to trough this week.
It is the multiple that the market is prepared to pay for these earnings that has crumpled, reflecting the loss of confidence in management as its growth path faltered.
According to Macquarie Equities, the stock traded at a multiple of more than 44 times earnings during COVID. Its market value is now 10 times its earnings.
As Samardzic says, it’s not a matter of having to execute perfectly on sales growth.
“They just need to rebuild credibility with the market … execute and rebuild credibility.”
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