CSL group owned more than 90 years experience in the biopharmaceutical industry. It aimed to indentify, develop, manufacture, retail and distribute important, new, biotherapeutic products that saved people lives by preventing or treating serious medical conditions. Its businesses were cross Australia, Germany, Switzerland, the US and other nations with more than 10,000 employees (CSL, 2011). This essay tries to undertake an analysis of CSL Limited using its most recent financial reports and market disclosures. Initially, it will state the background information of CSL, including its business strategy and core products. In the same part, it will examine how the recent financial crisis influence the corporate performance and strategy. Then, it will point out the method CSL using to reduce the exchange rate risk. To see whether the tool applied here succeed. Finally, it will stated personal recommendation of whether the company's stock is valuable to invest. It could be based on the history stock price and performances.
Business performance:
CSL's key business areas included R&D, plasma products and vaccines and pharmaceuticals these three parts (see Table one). To maintain or expand current market position, CSL invested over AUD$190m to its R&D department. Maybe because of this, it business activities got good results, although the global economy was under recession recently.
Table One: CSL's business structure
2-2.jpg
CSL announced a profit after tax of $1,053 million for the twelve months ended 30 June 2010 (down 8%). This result included a negative foreign exchange impact of $187 million. Under a constant currency condition, operating net profit after tax grew 22% if excluding one-off non-operation items in fiscal 2009, as previously disclosed. Net operating cash flow was $ 1.2 billion, up 14% on the previous year.
Plasma products sales were $3.5 billion, which rose 10% comparing to previous year in constant currency terms. CSL Biotherapies sales revenue reached $958 million this year (up 21% in constant currency terms). All these figures showed the general corporate performance was well and not be affected by the financial crisis. From Table two, the figure clear stated how well CSL operated.
Table Two: CSL's financial performance 2006 - 2010
2-1.jpg
Under the condition of well products sales, the company determined its potential strategy. In the medium term the company expected to continue to grow through developing differentiated plasma products, expanding flu vaccine sales internationally, receiving royalty flows from the exploitation of the Human Papillomavirus Vaccine. Over the longer term the company intended to develop new products which were protected by its own intellectual property and which were high margin human health medicines marketed and sold by the company's global operations. Generally, the potential business strategy for company could be divided into three parts:
New product development: focus on innovative new treatments for life-threatening diseases
CSL would continue to invest in the development of protein-based medicines to treat serious human illnesses. Currently, most of its licensed medicines were purified from its human plasma or made from human plasma or made from traditional sources, like influenza vaccines. In addition, CSL was building the capabilities requires to develop future products using recombinant DNA technology.
The new products faced new customer's needs, such as H5N5 and H1N1 influenza vaccine. The external environment was altering, the products should keep on developing or it would loss the customers and market. The CSL paid much attention on this part as it build a lot of R&D centers around the world. The managers teams though the innovation was the blood of a company. The most powerful weapon was development. Table three showed the locations of CSL's R&D centers.
The company had developed a set of values common to the diverse business units that form the CSL group. The CSL group values, endorsed by the Board, serve as the foundation for every day decision- marking. These values were superior performance, innovation, integrity, collaboration and customer focus.
Table Three: the R&D centers of CSL
5.png
Market development: seek to maximize market opportunities for existing products
The CSL operated its business across the world, while the market share and sales in these regions were different. It developed well in the developed countries, such as USA, Europe and Austria. However, it did poor in Asia which was the emerging and potential market. Table three gave the detail figure of the market share and sales around the world.
Today, CSL biotherapies managed the sales of plasma-derived therapies manufactured by CSL Behring in China, South Korea, Taiwan, Philippines, Malaysia, Singapore, Vietnam, Indonesia, Thailand and India. The company enhanced its employee in China to more than fifty (Pr-inside.com, 2010). They supported CSL products sales and further strengthened its existing Shanghai and Guangzhou presence there this year with an new office in Wuhan. The experienced team in Hong Kong would further provided centralized support for the mainland China and Asian region Operation.
Table Four: The sales volume of CSL across the world
3.png
Life cycle management: continuous improvement to ensure existing products
Ensuring CSL's therapies were safe and of the highest quality by maintaining the highest standards throughout all stages of the product life cycle. The company continued to make a balanced investment in the life cycle management and market development of existing products resulting in short to mid-term commercial benefits. Unlike developing new products, enhancing existing products life cycle was less risky. It did need lots of time, energy and capital. While, the limitation of life cycle managements was obviously. The old products could not catch up with the trends and would be replaced in the future. So the company not only improved the existing products to maintain the mid- term needs, but also developed the new products to the potential performances (Annual Report, 2010).
Foreign exchange exposures:
Usually, the corporate activities needed to face a variety of financial risks: market risk (currency and interest rate risk), credit risk and liquidity risk. As an international operating company, CSL's primary problem was the currency risk.
The parent entity operated cross the world and met the foreign exchange risk arising from various currency exposures. Foreign exchange risk arose from potential commercial transactions and recognized assets and liabilities calculated in a currency other than the parent company's functional currency and net investments in foreign operations (Annual report, 2010). Foreign exchange gains and losses were resulted from the settlement of transaction and from the translation at year end exchange rate of monetary assets and liabilities determined in functional currencies were recognized in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or were attributable to part of the net investment in a foreign operation.
The group's Treasury risk management applied the policy of hedging contractual commitments denominated in a foreign currency to minimize this kind of risk. The forward exchange contracts allowed CSL to purchase and sell specified amounts of foreign currencies at predetermined exchange rates in the future. The objective was to match the contracts with committed future cash flows from sales and purchases in foreign currencies to avoid floating foreign exchange rate. Contracts to buy and sell foreign currencies were entered into from time to time to offset purchase and sale obligations in order to maintain a desired hedge position (Annual report, 2010). The fair value of forward foreign exchange contracts is calculated by reference to current forward exchange rate to contracts with similar maturity profiles.
Table Five summarized the Australian dollar value of forward exchange agreements at balance date. Foreign currency amounts were translated at rate prevailing at reporting date. The Parent Company and other subsidiaries also entered into forward contracts to hedges foreign currency receivables from other entities within the group. These receivables were eliminated on consolidation, however, the hedges were in place to protect the Parent company and other group subsidiaries from movements in exchange rates that would give rise to a profit or loss impact (Pr-inside.com, 2010).
Table Five: The Australian dollar value of forward exchange agreements at balance date
2-3.jpg
The group reduced its foreign exchange risk on net investments in foreign operations, by denominating external borrowings in currencies that match the currencies of its foreign investments.
Included in interest bearing liabilities as at 30 June 2010, were unsecured notes amounting to US$58.8m (2009: US$ 65.8m) and EUR 60.7m(2009: EUR 63.1)that were designated as a hedge of the group's investment in CSL holdings Inc and CSL Behring GmbH. A net foreign exchange gain of $ 23.2m (2009: loss of $ 23.1m) was recognized in equity on translation of these borrowings to Australian Dollars. There was no ineffectiveness recognized on this hedging during the year.
The Group used derivative financial instruments in the form of forward foreign currency contracts to hedge risks associated with foreign currency. Such derivative instruments were primary recognized at fair value on the date a derivative contract was entered into and were subsequently re-measured to their fair value. The gain or loss on re-measurement to fair value was recognized immediately in the statement of comprehensive income. The fair value of forward foreign exchange contracts was calculated by reference to current forward exchange rates for contracts with similar maturity profiles.
Recommendation of purchasing stock:
current share constitutes
CSL ordinary shares had been traded on the Australian Stock Exchange since 30 May 1994. Melbourne was the home exchange. Until 30 June 2010, the CSL Limited issued capital ordinary shares 549,693,886. To promoting director and employee ownership of shares, the board hopes to encourage directors and employees to become long-term holders of company securities. The capital group company was a significant foreign shareholder in CSL ( see Appendix Table one and two: the shareholder distribution).
Purchasing decision
Fundamental analysts believed securities were prices according to fundamental economic data (Brown and Reilly, 2009). The estimation of future growth rates was an art rather than a science. The stock of a wonderful firm with superior management and strong performance measured by sales and earnings growth can be priced so high that the intrinsic value of the stock is below its current market price and should not be acquired.
Initially, the strong financial performance of CSL group showed their effective and efficiency guiding strategy and daily process. Based on the fundamental analysis system, the well performance company should have a well performance stock . so based on the annual report 2010, the stock of CSL was worth to purchase. From the Table six, it clearly showed the rising trend in the 2010. While, the stock prices arose in January and fell in February.
The reason might be the January effect. Number studies showed stock returns were inexplicably high in January and the small firms did better than large firms in January (Strong, 2007). From the table, the CSL stock did well in January. The explanation might stocks tend to trade near the bid price at the end of the year and toward the ask price at the beginning of the year. Another suggestion might the superior January performance came from tax loss trading late in December(Brown and Reilly, 2009).
Table Six: The stock price movement of CSL
1.png
In addition, the serious external economic effects also advanced the stock price. Since US Credit Crunch swept all around the world, the global economy dropped down to its weakest growth period in 15 years. From Table seven, it showed the weak performance of the average stock prices of Australia. Although the performance of CSL's stock was uncertain, comparing with the average level, it got an increment (Australian Securities exchange, 2011). Furthermore, the floating stock prices gave the investors opportunity of arbitrage.
The operation could be purchased the stock at a lower price and then sold it at a higher one. The price movement was frequent, for example, it had a obvious January effect. The investors could saw whether the this stock had weekend effect or others. These also gave the investors chances to gain the profits.
Generally, the performance of CSL was well and effective, expect its foreign exchange rate risk. Although the macro economy background was still under recession period, it did not affect the business of CSL. The stock movement of CSL was uncertain, the investors still could make arbitrage during the floating period. The stock of CSL was worth to invest.
Table Seven: The price index of S&P/ASX200
2.png
Conclusion:
This essay was a management report to assessing the basic information about CSL. CSL was the effective biopharmaceutical company operating business across the world. Under the general recession background, its core products still had a good selling results. Its strategy was changed to face the recent economy. Develop new products, expand the existing market and products were the three key strategies. The company gained the profit if the currency rate kept constant. Considering this problem, the company applied the hedging contractual commitments denominated in a foreign currency to minimize this kind of risk. The contract by denominating external borrowings in currencies to match the currencies of its foreign investments. In this year, the result was not obviously. However, for longer time, it would have the effects. If the investor wanted to purchase the stock of CSL, the personal suggestion was this was an opportunity to make a arbitrage. The price movements was floating but have the discipline, such as the January Effect. The investor could according the history data to forecast the potential stock price. In addition, the general corporate performance was great, which might enhance the confidence of investors.
References:
Annual Report (2010). CSL limited annual Report 2009-2010. Available at:
< http://www.csl.com.au/docs/748/922/csl_ar_2010.pdf>. 20th May 2011
Australian Securities exchange (2011). CSL securities information. Available at:
< http://www.asx.com.au/index.htm >19th May 2011
Brown, K.C. and Reilly, F.K. (2009). Analysis of investment and Management of portfolio. South-Western, Beijing, China.
CSL (2011). Our business. Available at: < http://www.csl.com.au/businesses >. 20th May 2011
Pr-inside.com (2010). CSL limited - Financial and strategic analysis Review - New company profile and analysis released. Available at:
< http://www.pr-inside.com/csl-limited-csl-financial-and-r2020588.htm >. 21st May 2011
Strong, R.A. (2007). Management for Practical investment. Thomson Higher Education, Mason, USA.
