Baxter International (BAX) started it with a profit warning last week, saying that its blood plasma revenues would not grow by the expected mid-single digits for 2010 and instead would decline by a damaging mid-single digits. The group fashionably included US healthcare reform as one of the reasons for the dip, but the news of its difficulties soon caused the other main players in the plasma sector to rapidly start hemorrhaging value.
While Baxter finished last week with a 17% decline in its shares to a 10-month low, the likes of Talecris Biotherapeutics (TLCR) dipped 11%, Grifols (GIFLF.PK) was down by 12% and despite CSL (CMXHY.PK) protesting it would not be revising its earnings guidance, its shares also finished the week 8% lower. The falls are perhaps so steep because, as can be seen from the table below, many had been expecting the good old days in the plasma and immune globulin market to continue and growth in the sector to continue at roughly 7% over the next seven years.
But these forecasts are almost certain to come down and if Baxter is anything to go by, could slip into negative territory, at least for 2010.
Market fundamentals
Healthcare reform, or the ramifications of it, may indeed be one of the reasons for Baxter predicting a bad 2010 for its plasma franchise, but there are other multiple and more fundamental reasons for the current weakness in the plasma market.
Looming large among the culprits is lower demand, especially at the higher and more lucrative end of the market, intravenous immunoglobulin (IVIG), typically used for people with weakened immune systems. Here it is thought that the number of people losing their jobs during the recession and therefore their health coverage may have had a bigger impact than previously thought.
Vincente Martin, healthcare analyst with Santander, estimates that the cost of IVIG treatment can range from as much as $50,000 to $90,000 a year. “In the current environment it is clear that these treatments are looking very expensive and this is the same for coagulation prices.”
Adding to the industries woes, this decreased demand in the US has coincided with a destocking by both distributors and hospitals. To obtain good discounts, hospitals and distributors are encouraged to bulk buy. As such, if their inventories are now full, orders are likely to be reduced, meaning that there could be little prospect of a recovery during 2010.
“The fundamentals in the sector are weaker than they were a year ago. If you look at the market it is growing at a lower rate in the US, 1-2% compared to 7-8% a year ago,” Mr. Martin added. “Nobody knows what is going to be the revised growth rate for the business.”
Over-stocking
Completing the ingredients for a perfect storm is the excessive supply in the market, which in turn has led some to offer bigger discounts to entice customers, which has resulted in lower pricing. Baxter, which has been losing some market share in the last few quarters to the likes of Talecris and CSL as they have cut their prices, has itself recently announced that it too will be reducing the cost of some of its products.
The glut for plasma products is a direct result in the growth in plasma collection, which has in the last three to four years been growing 15-20% a year. Demand has not kept up with this rate of supply and as such many plasma collection companies are overstocked.
Mr. Martin estimates that Grifols has 13 months of plasma supplies. The normal inventory levels are 7-8 months. If as suspected other companies are similarly overstocked, then the bad time for the industry could be set to continue for sometime as higher inventory will result in higher working capital and costs, further increasing pressure on these companies.
With the outlook for the plasma market looking so gloomy, last year’s failed merger between CSL and Talecris could now look like a blessing in disguise (CSL’s reality check sinks Talecris deal, June 9, 2009).
Source - Seekingalpha
