Shares of biotech company CSL Ltd [ASX:CSL] are trading lower this morning, upon news it will be changing its distribution model. At time of writing, CSL’s share price is down 2.75% to trade at $213.32 per share.
The CSL operations arm, which include CSL Behring and Seqirus, provides life-saving products to more than 60 countries but operates predominately in Australia, US, UK, Germany and Switzerland.
Supply practice is changing
Back in February this year, CSL announced it would be transitioning to its own Good Supply Practice (GSP) License in China in FY20. This licence enables CSL to own and sell products in the domestic Chinese market.
CSL has been importing albumin (the main protein in human blood plasma) into China for more than 30 years and is now the largest supplier of imported human albumin. In FY18, CSL’s albumin sales into this market were over $500 million.
The product is currently distributed via a third party, meaning sales are recorded when the product leaves the company’s manufacturing facilities in the USA and Europe, where the product then must travel via a multi-month supply chain. According to CSL, this model has caused inefficiencies within the final distribution to the end customer.
In transitioning to its own GSP business model, CSL said it will enhance its ability to serve patients more effectively in the Chinese market. The license elevates CSL to Tier 1 distributor status affording the company several benefits, including improved participation in the value chain, removing reliance on third parties and importantly allowing CSL to work directly with clinicians.
While the new supply practice may sound good, it’s the impact on the company’s cash flows that have investors worried.
According to CSL, the transition will create a ‘one-off’ financial effect in FY2020. Current expectations will see albumin sales drop by approximately $340–$370 million.
The company also expects a modest impact on cash flow as they continue to collect outstanding receivables from existing distributors. If all goes to plan, CSL says it doesn’t expect cash flows to normalise until FY21, following the completion of the transition.
CSL’s Share Price outlook
After strong results published in its half yearly report, CSL looks like it is in a decent position to take the hit in cash flow quite well. Longer term, the realised benefits of owning the whole supply chain, particularly in China, will easily cover the one-off cost next year.
As trade tensions are unlikely to ease any time soon, long-term planning in a massively expanding market should pay good dividends. Moreover, the company had been experiencing constriction in import supply to China, likely caused by bureaucratic inefficiencies within the existing supply chain.
CSL anticipates their new GSP model will allow it to broaden its product offering in the region as well as align their distribution model with other major markets.
For Money Morning
PS: If you’re interested in how you can take advantage of China’s new boom, check out our brand-new Money Morning report: ‘China’s New Boom: Three Aussie Investments Primed to Soar in 2019 and Beyond. Read more about it here (for free).