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Edited Transcript of CSL.AX earnings conference call or presentation 13-Feb-19 12:00am GMT

Half Year 2019 CSL Ltd Earnings Call

Victoria Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of CSL Ltd earnings conference call or presentation Wednesday, February 13, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Mark Lamont

CSL Limited - CFO

* Mark Dehring

CSL Limited - VP of IR

* Paul R. Perreault

CSL Limited - MD, CEO & Executive Director

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Conference Call Participants

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* Andrew Goodsall

MST Marquee - Healthcare analyst

* Chris Cooper

Goldman Sachs Group Inc., Research Division - Research Analyst

* Craig Wong-Pan

Deutsche Bank AG, Research Division - Research Analyst

* David A. Low

JP Morgan Chase & Co, Research Division - Research Analyst

* David Andrew Stanton

CLSA Limited, Research Division - Research Analyst

* David Bailey

Macquarie Research - Research Analyst

* Gretel Janu

Crédit Suisse AG, Research Division - Research Analyst

* John Deakin-Bell

Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand

* Lyanne Harrison

BofA Merrill Lynch, Research Division - VP

* Saul Hadassin

UBS Investment Bank, Research Division - Executive Director & Research Analyst

* Sean M. Laaman

Morgan Stanley, Research Division - Australian Healthcare Analyst

* Shane A. Storey

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst

* Steven David Wheen

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

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Presentation

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Mark Dehring, CSL Limited - VP of IR [1]

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Ladies and gentlemen, good morning, and welcome to CSL's Half Year Results Call for Fiscal 2019. It's Mark Dehring speaking, and I have with me here in the room, Paul Perreault, CSL's Chief Executive Officer; and David Lamont, CSL's Chief Financial Officer. And as with past practice, Paul will be providing an overview of the results and operations; and David will provide some additional detail on the financials. And then, we'll move to question and answers. Please note, this briefing is being webcast. And lastly, before we start, I draw your attention to the forward statement disclaimer contained in your packs.

And with that, I'll pass you over to Paul Perreault.

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [2]

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Thank you, Mark, and good morning, everyone, and thank you for joining us today to review CSL's first half results.

We'll move on to the first slide. Thank you. So I'm pleased to report that CSL has delivered a solid first half performance, with revenue up 11% at constant currency and net profit after tax up 10% at constant currency. This level of growth in both revenue and net profit is particular pleasing given the strong performance in the previous half year, which the first half '18 impact growth was 35%. We're on track to deliver another full year of significant growth at CSL.

Today, I'd like to update you on how we're continuing to execute on our strategy and take you through some of the operating highlights for the first half, and David will provide more details on the financials. I'll then finish with an update on our outlook for the remainder of fiscal year '19, and then, as Mark said, we'll be happy to take questions.

So on Slide 3, delivering on our strategy, I'd like to start to -- by reviewing the strategic objectives, and how we continue to execute our strategy to deliver value for all of our stakeholders.

Our strategy hasn't changed, and it remains consistent. We're focused on delivering innovative medicines to patients around the world, helping to save and improve the lives of those living with serious and rare conditions. And to be successful, it comes down to focus and, of course, execution, two areas that we obviously pay a lot of attention to at CSL.

The first pillar of our strategy is growth. And on the slide, you can see many examples of strong growth that we delivered in the first half. This includes our immunoglobulin products through to our hemophilia product IDELVION and our Specialty products portfolio, including HAEGARDA and KCENTRA in the Behring business. With the Seqirus influenza vaccines business, we delivered strong growth as well and enhanced our manufacturing capabilities. Albumin and plasma-derived hemophilia are 2 areas which underperformed a little, and we're aggressively addressing this return to growth. And I'll go more into detail on each of our therapeutic areas shortly.

Moving on to Slide 4, innovation, which is a long-standing hallmark of CSL's strategy. It's one of our strengths, and we continue to deliver innovation across the organization, including through our world-class R&D capabilities. Highlights for the first half include gaining approval for the CIDP indication for HIZENTRA in Australia. This follows approvals in the U.S. and Europe in the previous financial year.

We've had 5 new products enter into clinical trials, which we're excited about, and outlined in our R&D day that you attended in December.

Recruitment for CSL 112, our Phase III trial targeting cardiovascular disease, is progressing well. And I'm pleased to report that over the weekend, we enrolled our 1,000th patient in the AEGIS-2 trial.

We have a lot of work going in the transplant space. This is a large area of unmet medical need and one in which we see significant opportunities for CSL's existing plasma products, along with the relationship that we've garnered with Vitaeris with our IL-6 antibody.

Along with innovation, efficiency is another hallmark of CSL and a competitive advantage for us. This includes really expansion of our plasma collection network, the largest and most efficient network in the world as well as increasing our manufacturing capacity to meet the growing demand for our therapies.

We're always looking at ways to do things better and more efficiently, and for example, we've made significant investments in our new ERP systems across all of our sites and operations. We also opened a new research facility in Melbourne in December, and we have a number of major capital projects throughout the company that are progressing well.

And people and culture, I'm proud to report that CSL was named in the top 100 companies globally for diversity and inclusion by Thomson Reuters and among the top 50 companies for diversity in the U.S. by Forbes Magazine. I believe this is a reflection of the CSL organization and the values that we all try to adhere to.

Moving on to Slide 5, in new product launches. And I'd just say before I go into more detail on the recent performance, it's important to reflect on the slide, demonstrating our ability to continue to innovate and deliver new products into the market. In 24 months, we launched 5 major products, which is really unprecedented in the industry and in my career. Delivering these transformative therapies, I believe, speaks volumes to our R&Ds team's capabilities and the focus that they've had to bring these products to market. Importantly, we are significantly improving the lives of patients around the world, and that's why we're in business. Without the patients, we really don't have a purpose.

Once these products are launched, it doesn't stop. It's a continual focus, and that's where our commercial excellence comes to the forefront. You really need exceptional commercial capabilities to execute and launch this many products in a short time frame, and that's what we've been able to achieve.

Two of these, namely, HAEGARDA and IDELVION, have been among the most successful launches in the industry. We've established market leadership, and this comes down to not only the innovation of the products but the execution of the launches. And these products are all making a significant contribution to CSL now, and I have to say they will in the future. Many times when we talk about new product launches, people take that as, "Okay, you've launched, now what's next?" These products continue to grow. It takes investment in the commercial infrastructure, as I mentioned, to be able to continue to drive against competition and to expand the diagnosis, awareness and then actual usage of these products in the medical community.

Moving on to the next slide. In the CSL Behring area of the business, we recorded overall growth of 8% at constant currency as part of the sustainable growth of the organization. As I mentioned earlier, this is an exceptional result, given the strong comparative period in 2018, which followed even stronger period in 2017 when we had atypical market conditions.

Solid growth was delivered by the immunoglobulins, our largest products in the franchise, and Specialty products, whilst hemophilia and Albumin recorded modest declines. There are factors contributing to this, which I'll discuss in just a moment.

In terms of our geographic split, North America and Europe continue to be our 2 main markets, and we're also driving strong growth in the emerging markets with the rest of the world segment delivering 20% growth.

Under the immunoglobulin franchise, demand for the IG products has continued to be very strong. We've achieved substantial above-market growth for our RG portfolio. Our 2 leading products, Privigen and HIZENTRA, continue to deliver, growing at 17% and 14%, respectively. This growth has been fueled by the increased usage of IG for chronic indications following greater disease awareness, improved diagnosis and, to a lesser extent, the growth of the U.S. economy.

As we've mentioned before, the 3 main indications for IG usage are primary immunodeficiency, secondary immune deficiency and CIDP, with CIDP now being the single largest indication for IG on a global basis today.

Following the approval of HIZENTRA for CIDP indication last year in the U.S., we now have launched into the segment for the U.S. market. While it's still early days, the response has been very positive and contributed to the above-market growth of HIZENTRA.

The subcutaneous segment of the IG market has been growing strongly. This is being driven by both new patient starts and patient switches from IVIg to the subcutaneous therapy due to the convenience of self-administration and the patients being able to manage their disease at home.

HIZENTRA continues to be the market leader in subcutaneous immunoglobulin, capturing the majority of new starts. HIZENTRA is the only subcutaneous IG product in the market with a CIDP claim. CSL is the only company that offers both IV and subcu options to CIDP patients.

We are the global leader in immunoglobulins and continue to hold this position despite the intense competition in the marketplace. During the period, we discontinued manufacturing of our lyophilized IG in Bern. This product traded under the names of Carimune and Sandoglobulin. Carimune has now been withdrawn from the market in the U.S. Outside the U.S., there's still some residual sales being made up from the remaining inventory but those sales are minimal.

Moving on to hemophilia. The highlight is exceptional growth in our recombinant coagulation products led by IDELVION, our transformative recombinant factor IX product for hemophilia B. IDELVION continues to go from strength to strength and was up 55% for the period. It has been launched now in 13 countries, rapidly becoming the leading brand and the new standard of care in markets in which we have launched.

In the U.S., we continue to add more and more patients, a remarkable change in therapy for these patients and remarkable growth since launching in 2016. We've also had a strong uptake in Japan, where IDELVION is now also the market leader.

In hemophilia A market, our recombinant factor VIII product, AFSTYLA, continues to grow well despite intense competition in the market. We've launched AFSTYLA in 14 countries, and we continue to see increasing patient numbers. The transition from AFSTYLA to Helixate is all but complete, and we expect the margin contribution from AFSTYLA to replace and expand on the economic return we previously derived from our Helixate franchise.

Other plasma-derived coagulation products declined in the first half due to a number of different factors. We had some manufacturing bottlenecks at our Kankakee site, which affected sales of HUMATE. This was around some packaging and labeling issues, and we're currently in the process of rectifying those. There's also been some volatility in the European tender markets, which is the very nature of these markets. And tenders, as you know, come up from time to time. They are a bit lumpy. We don't always win them. And in this case, they can have an impact on our overall pricing mix. The other factor that's had an impact has been switching from Mononine to IDELVION, understandable, given the attractive profile of the IDELVION product and actually not bad news for -- certainly, for the patients that are seeing the performance of the product.

Overall, the performance in plasma-derived coagulation therapies has been below our expectations and we're working hard to address this, remembering that we're still generating close to $0.5 billion in plasma-derived sales, and many of these of plasma-derived products are at lower prices in the developing countries. At the same time, I'd say that the implementation of serialization in Europe, which was required by February 9, did have an impact on our ability. As I mentioned before, [at the sites], to make sure that all of the serialization was intact and underway.

Moving on to Albumin, on Slide 9. This has been a bit of a challenging area during the period. Sales were down 4% despite volume growing at 3%. There were some pricing pressures in China. However, the key driver in the sales decline was a temporary constriction in the import supply for China.

Demand for the imported albumin into China is still strong and growing. And to meet the increased demand, we're in the process of seeking formal approval from the Chinese authorities to supply AlbuRx from our Kankakee facility. This approval is pending, and once approved, we expect our albumin sales to return to growth. On the positive side, albumin sales have been strong in Europe and the emerging markets.

Coming back to China for just a minute, one of the initiatives we've undertaken is to acquire our own Good Supply Practice license, or GSP license. We acquired this in 2018, and we'll be looking to start operating under this license in fiscal 2020. Having of our own license means CSL will be able to work directly with our customers which we haven't been able to do through previous third-party arrangements.

David will cover off on the financial implications of this in his section, but it means we'll have improved transparency through the supply chain and we'll not have to rely on third parties enhancing our commercial capabilities in the China market.

Moving on to Slide 10, in Specialty products. Our Specialty products continues to grow at healthy double-digits. HAEGARDA was again a standout. Since launching in the U.S. in mid-2017, HAEGARDA has had an overwhelmingly positive response and a rapid adoption. It is changing people's lives. Strong demand for HAEGARDA continued during the first half of '19, which saw sales triple from the previous half. HAEGARDA's attractive clinical profile continues to drive patient adherence and new patient starts. HAEGARDA is the most prescribed product for HAE prophylaxis in the U.S., with its market share now over the 50% mark.

Another Specialty product that continues to grow strongly is KCENTRA. KCENTRA was up 19% globally, driven by another strong performance in the U.S., which was up 23% due to the expanding usage in existing accounts and an increase in new accounts. KCENTRA is also performing strongly in Japan where the takeup has continued to grow since it was launched in September 2017. It has now been adopted by 800 hospitals and used by more than 2,800 patients in Japan.

To finish on Specialty products, there were a couple of products that underperformed. One was BERINERT that has been impacted by the actual success of HAEGARDA, and secondly was our wound healing. Sales were down half-on-half, but that's because in the previous half, there was competitor missing in the Japan market. This competitor has since returned and the sales for wound healing have normalized and they're consistent with the trailing period.

Moving on to Efficiency in Slide 11, one of our other key strategic objectives. We have 2 examples of how we're continually driving further efficiencies throughout the CSL organization. Efficiency in terms of research with the opening of our new facility in Melbourne. I have to say that the state-of-the-art facility, in partnership with the University of Melbourne, expands the footprint of Bio21 Institute and will house CSL's global hub for translation and research medicine.

This facility allows CSL to double the research scientists of Bio21 to approximately 150 scientists over time and enable greater knowledge in technology transfer, drive innovation and, ultimately, translate the science into life-saving medicines. It is a much more efficient facility, where our scientists now have the room, the space and the ability to get their research done in a much more efficient manner.

We've also been implementing new ERP systems across CSL Behring and Seqirus. The rollout has been completed in the U.S. and Europe, and Asia Pacific is now underway. This has been a major transformative program for CSL. It's not just a technology implementation or a business process redesign but rather organizational transformation. This will expand our global standards, it provides best-in-class processes and enhance systems, giving our people really tools to deliver on our promise to the patients that we serve. It is about doing things in a more efficient way. When we talk about efficiencies, people tend to focus on manufacturing efficiencies or plasma efficiencies, but the way in which people work in our organization also has to be efficient.

Moving on to innovation in Slide 12. Innovation is really our future, and CSL Behring Therapeutic Area Framework that we introduced on our R&D day last December will really help drive that innovation and cross-functional work. What you see on the slide are 5 groupings of the diseases of interest to us. As you know, CSL likes to keep focused on things that are in our core competencies, our core adjacencies and our core capabilities and areas that we can add value to. This organization and structure helps us to target areas for our product innovation. It's also how we organize our commercial operations and, importantly, it provides us with focus. We try not to get distracted by opportunities outside these therapeutic areas unless we're sure that we can add value.

The main diseases and areas of interest to us are our immunology and neurology franchises, hematology and thrombosis, transplant, respiratory, and cardiovascular and metabolic diseases. They intersect nicely with both the science, externally and internally as well as our 3 product development platforms of plasma, recombinant technologies and gene and cell therapy, which are shown in the gray columns.

So going forward, this is how we'll be organizing our R&D efforts and also our commercial teams. We have a deep pipeline of really exciting opportunities in each of these areas, and I'm looking forward to sharing these with you as they continue to progress.

Moving on to Seqirus revenue in Slide 13. Seqirus business is running to plan. Only 3 years ago, Seqirus posted a full year loss of more than $200 million, and whilst I acknowledge that sales are heavily skewed to the first half of the financial year, with about 80-20 split in the first half versus second, Seqirus delivered a first half EBIT of over $300 million. I think the Seqirus team have done an excellent job in taking this business to profitability.

Looking more closely at the sales growth continued during the first half, with revenue up 21%. The main driver was increased sales of seasonal influenza vaccine and continued transition of the portfolio to our higher-valued quadrivalent influenza vaccines and a significant increase in FLUAD, the adjuvanted influenza vaccine sales. The sales also includes a one-off TIV sale of 15.6 million doses in Mexico, a small margin and probably not repeated in fiscal year '20 as that's also tendered markets.

As you know, the first half is dominated by the sales into the northern hemisphere, which is reflected in the pie chart on the right-hand side of the slide.

In terms of operational highlights, within Seqirus, the FDA has approved a new manufacturing process for the production of Flucelvax at Holly Springs. This new process will deliver significant uplift in the future manufacturing capacity out of the Holly Springs facility.

We've seen several very positive data points in relation to the impact of Flucelvax, the most recent of which was the Allscripts data. This is real-world effectiveness data, which indicates Flucelvax, our cell-based influenza vaccine, was 36.2% more effective than standard egg-based QIV, our quadrivalent vaccine, in preventing influenza-like illnesses in the U.S. 2017, 2018 season. Again, very encouraging of what's being seen in the real world.

FLUAD and Flucelvax were both granted preferred recommendation for the over-65 population in the U.K. And this underpinned FLUAD sales more than doubling during the period, with a record 9.8 million doses distributed in the U.K. this past year.

So looking forward, FLUAD has been granted preferred recommendation for 65 and over also for the forthcoming season in the Australian public market. Flucelvax has been approved in the EU and will be launched in '19/'20 northern hemisphere season. We have announced a new investment of Holly Springs for new fill-and-finish packaging and finishing line to meet the growing demand for our cell-culture vaccines. And the Liverpool fill-and-finish operations will come online from the southern hemisphere season in 2021. Overall, Seqirus is making very good progress. The strategy remains firmly on track.

And our Seqirus President, Gordon Naylor, who I've known and worked closely with for the past 15 years, has done an excellent job in leading this business into profitability. Gordon has decided to retire later this year after a successful 31-year career with CSL. He'll continue to lead Seqirus until his replacement is appointed.

And I'd like to recognize and thank Gordon for his stellar leadership, his outstanding contributions and loyal service to CSL since 1987. When he does depart to do other things, he will be missed. And I have to say that Gordon is still running the business, and we'll continue, as we do at CSL, with smooth transitions in leadership. So Gordon will remain until a new appointee is in place, and the handover should be as smooth as the others that we've had here at CSL.

I'll now hand over to David to talk you through some of the financials. David?

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David Mark Lamont, CSL Limited - CFO [3]

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Thanks, Paul, and good morning, everyone.

As Paul said from the outset, CSL has delivered a strong result for the first half of 2019. On Slide 16, you will see our reported net profit after tax increase 7% from USD 1.086 billion to USD 1.161 billion. On a constant currency basis, the increase in net profit was 10% as we experienced a foreign currency headwind of some $35 million.

I would also like to reiterate the point that the growth in net profit after tax is particularly pleasing when compared to the previous half year in 2018, which was up some 35% on each prior corresponding period.

Looking at the financials in more detail on Slide 17. Revenue was up 11% on a constant currency basis to USD 4.581 billion. Earnings before interest and tax was up 6% on a constant currency basis, and this has been impacted by some uneven expenditure phasing and some one-offs, which I will detail later. Cash flow from operations was $535 million, which was down some 36%. This was largely due to the physical payment of tax. And you will recall that the trailing period effective tax rate was 25%. For the full year, the tax rate is expected to revert back to the low 20s. We also grew our working capital. And as an example, the inventory of our raw material, in particular, was up some $220 million. This is consistent with our objective to build our plasma collections. Return on invested capital was 29.9%. Earnings per share was up 10% at constant currency, in line with the net profit after tax growth. And finally, the interim dividend was USD 0.85, up 8%. And in Australian dollars, this translates to AUD 1.20, which was up some 20%, reflecting the weakening of the Australian dollar against the U.S.

Turning to Slide 18. I'd like to draw your attention to the movement in our expense items. The table on the left picks up the movements shown in our financial statements and reflects investments we are making for the future of the company as well as a couple of one-off items.

Firstly, research and development. By the very nature of R&D, this line can be a little bit lumpy. Growth in the first half includes the lift in spend for CSL112 as we progress with the Phase III trial. Also included is a milestone payment to Vitaeris of some $25 million.

We are onboarding 15% more staff since this time last year. The new product launches needed for commercial support, particularly in the early part of their life cycles as they move towards peak sales is a critical component.

As we invest in expanding our manufacturing facilities around the globe, we are simultaneously rolling out our new ERP systems, both in CSL Behring and Seqirus. We want to ensure the robustness, consistency and efficiency right across the manufacturing spine. As you will see, this has also led to an increase in our depreciation and amortization line.

There are couple of one-off items as well. A donation of Helixate to the World Federation of hemophilia, some $12 million, is shown in the commercial line; and we have a reallocation in the treatment of our FX.

You will have read in our FX notes in half 1 2018 that we had FX gain of some $33.5 million and this was reflected in the G&A line. This period, however, there is an FX loss of some $31.5 million which is largely shown in the finance cost line.

The total SG&A for the half, whilst up over the prior corresponding period, is actually slightly less than the trailing period and more indicative of what we can expect in the second half.

On Slide 19, we have CSL's Behring's margin for both gross margin and EBITDA margin. The first point to note here, as illustrated by the charts, is that the margins on a half yearly basis tend to move around. Whereas if you look at the full year margins, they are more representative of the underlying performance.

The trend has been positive, particularly in the gross margin line over the past 2 to 3 years. Launches of our new recombinant products, the growth in Specialty products and a variety of product and geographic mix shifts have all contributed to this positive trend.

Tempering margin growth has been a modest increase in plasma costs. This is an industry-wide phenomenon, and the U.S. -- and as the U.S. economy improves, then demand for this raw material rises.

Looking into the second half, Seqirus' margins will come under pressure, simply as a function of the business sale seasonality. CSL Behring's gross margin for the full year is expected to be a modest increase above the full year for 2018.

Again, don't read too much into the half year margin movements.

On Slide 20, we provided some further details into our key capital project completion time lines, going all the way out to 2025.

Demand for our products are strong, and we need to invest to ensure we can supply these medicines. There is a lot of expansion going on right across the company, and hopefully, you will see some of -- some of you will take advantage to visit our U.S. sites in early April to see some of this activity firsthand.

To finish up, I'd like to provide a little more detail around the Good Supply Practices, or the GSP license in China and the financial implications that we expect. At present, when we import albumin into China, the sale is recognized when it leaves our manufacturing facilities on its way to our third-party distributor in China. Between that time and the time the product is actually in the hands of a customer, there is a multi-month supply chain process. This involves the physical shipment to China, quality release by the Chinese authorities, maintenance of a safety stock and the final distribution to the customer.

When we transition to our own GSP license, the sale will be recognized when it leaves our own Chinese distributor. This transition will be phasing over the next 12 to 24 months, causing a one-off multi-month adjustment in recognition of our sales. There will be a similar, but a lesser impact to the company's overall cash flow.

It is important to note that these changes will not have any impact on the supply to patients, and we will detail the impact of that when we give guidance for 2020.

With that, I'd now like to hand back to Paul.

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [4]

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Thanks, David. I'd like to make a few comments now on our outlook for fiscal '19 before we take questions.

The first thing I'd say is that we still expect strong demand for the therapies that we manufacture and deliver to patients to continue. We do see strong demand still underlying our core business throughout the world, and I don't see that stopping just because we're into a new half. That's a continuum that we've seen for the past couple of years, and certainly, we still expect there to be strong demand.

Our Seqirus business is tracking to plan, but due to the seasonality of influenza and the split between the northern and southern hemisphere, Seqirus is expected to make a loss in the second half. And I'll just remind you of that as you've seen that year-on-year.

As previously guided, CSL's net profit after tax for fiscal year '19 would be in the range of approximately $1.88 billion to $1.95 billion at constant currency. We now anticipate the profit figure to be around the upper end of that range. And of course, our forward-looking statements are subject to the usual disclaimers as mentioned at the start of this presentation.

So I think I'll wrap it there, and we'll turn it back to Mark to -- for the questions. Mark?

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Mark Dehring, CSL Limited - VP of IR [5]

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Thanks, Paul, and operator, if you could open the lines up for questions.

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Questions and Answers

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Mark Dehring, CSL Limited - VP of IR [1]

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I see we have a question on line already. Chris Cooper at Goldman Sachs.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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Can I just make a start on Albumin, please. So I mean, first of all, when do you expect to get the FDA approval for AlbuRx from Kankakee? And basically, just on your guidance, I mean, is that something you need to be delivered in the second half for your guidance to be met? Or would that be upside?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [3]

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No. Look, we're looking to -- no, it was what we had expected already, Chris. So we're expecting it in second half and the inventory that we have because we've certainly been making the AlbuRx to get the approvals and the validations. So we expect that to start flowing through in the second half. That was part of the plan, and also, it'll flow into next year.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [4]

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Got it. And you made reference to strong growth for Albumin in Europe and emerging markets. Can I just ask for a comment on the U.S. as well, how that developed through the period for Albumin?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [5]

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Now look, the Albumin in the U.S., I'd say, is more level. I'd say that there's a lot of the competition that is obviously also selling into the U.S. And we haven't seen the expansion in the U.S. as much as we've seen in the other markets. There's some slight increase in demand, but it's on the margins. It's mostly, I would say, flat in the U.S. China, there's still large demand. I'd say, we're still in the upper single digits in terms of demand with Albumin in China. And this has just been a mix issue with us in terms of the AlbuRx approvals that we're trying to get through Kankakee. So with the rest of the world continuing to show strong demand, I'm still confident that Albumin will continue to deliver.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [6]

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Got it. Just on the Behring gross margin, I mean, that's -- it looks to be a pretty nice development through the period. Can you just comment on the key drivers there? I mean, you've talked previously about the tightness of the labor market and potential low-single-digit growth in plasma collection to the donor feed. But clearly, there's been a benefit in terms of mix and quite possibly like-for-like pricing. Can you just help us to understand the key sort of components of what's driven that gross margin up in the first half '19 over the current -- previous couple of periods?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [7]

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Now look, I'll let David comment on some of the key drivers, Chris. But I'd say that, first of all, they're beautiful margins. They're not bad. But not everything grows. So there are demands on things. So I don't want to get too carried away. I think, we'll see, as David mentioned, the slight increase in margins for the full year. But David, do you want to talk about some of those drivers?

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David Mark Lamont, CSL Limited - CFO [8]

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Yes. So Chris, you touched on several of those. I mean the one that I would certainly draw your attention to is have a look at the IG portfolio, primarily. Clearly, what we do see is the U.S. market is favorable from a global ASP perspective, and clearly also selling more HIZENTRA aids into that process. So certainly, whilst we have seen, as the numbers have shown you, some impacts on the Albumin side of things. If you look at our marginal products, we're still seeing an increase aspect there. Obviously, those marginal products do also wear the full cost of plasma, and we have seen some impacts there. But that has been more than offset by what we're seeing in the mix and the geography side of things alongside the ASP. And then, as we have also articulated, we've seen some good growth in the recombinant portfolio. They are high-margin products, and clearly, that assists. And as we have articulated certainly, getting out of Helixate, which was our lowest margin product being that it was a distributor at sort of that 10% to 15% side of things, has also aided. So there's multiple aspects going into it. But certainly, the headline, I would say, is certainly, the good, strong performance that we've seen in IG.

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Chris Cooper, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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Sorry, just final question and that's just a follow-up. If I was to push you on what the like-for-like price increase was in IG in first half '19 over first half of '18, what that would be?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [10]

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That you can push. Might be a pushback. I mean we're not going to come out and say exactly what the pricing is, but it's obviously been pretty favorable.

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Mark Dehring, CSL Limited - VP of IR [11]

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Thanks, Chris. We have another question on line from Lyanne Harrison at Bank of America.

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Lyanne Harrison, BofA Merrill Lynch, Research Division - VP [12]

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I've got a question around the heredity angioedema franchise, and I've noted that HAEGARDA is doing quite well, but you also called out that BERINERT was impacted by HAEGARDA. Overall, with your -- all the products in HAE, how's that doing overall as a portfolio of therapy?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [13]

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Thanks, Lyanne. Yes, it's growing significantly because the BERINERT was being used mostly for on-demand patients. And when we say on-demand, these are patients that have attacks less frequently than somebody that would traditionally go on prophylaxis. But with the profile of HAEGARDA, you're actually seeing the utilization change where patients that used to be on-demand are going on prophylaxis with HAEGARDA, and so it's more of a shift from BERINERT to HAEGARDA. When we say impacted it's more -- little bit more cannibalization because the therapy prevents attacks at a much better rate. And so those patients don't have as frequent of an attack -- attacks as those that are on prophylaxis. But overall, the franchise is growing significantly.

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Lyanne Harrison, BofA Merrill Lynch, Research Division - VP [14]

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Okay. And then on another note around supply, what's the timetable like for the HAEGARDA production output or increasing supply. Is that still on track for June, July this year?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [15]

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Look, yes. We're still moving forward on those issues. So it's a constant daily, I would say, focus in the organization. But we're still on track to bringing that additional capacity online.

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Lyanne Harrison, BofA Merrill Lynch, Research Division - VP [16]

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Okay. And then moving on to the hemophilia franchise, primarily, the plasma-derived coags. You mentioned there were some bottlenecks there and that's still ongoing. How long have those bottlenecks in place and when do you have to resolve them?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [17]

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Well, they're short-term issues. They've mostly been resolved now. So it's not a -- it wasn't an ongoing issue. It just happened to hit in the first half of the year. So it's -- these are huge facilities, complex plants, complex manufacturing. And most of the -- so I have to say that there was a lot of work around the serialization, as I mentioned before, in our packaging areas and making sure that it comes through. So I wouldn't take it as we couldn't produce, as much as we were trying to get it through the system. So that's really the comment there.

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Lyanne Harrison, BofA Merrill Lynch, Research Division - VP [18]

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Okay. And then one final question on Albumin. The temporary constriction in import supply for China, can you just shed a little bit more color around that?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [19]

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I'm sorry. I missed that. The temporary...

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Lyanne Harrison, BofA Merrill Lynch, Research Division - VP [20]

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The temporary constriction in import supply for China for Albumin, can you shed a bit more light on that?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [21]

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Okay. Thanks, Lyanne. Yes. That's our AlbuRx brand. So out of Kankakee, the Kankakee was producing a brand of Albumin, called Albuminar, and we were -- we have changed that manufacturing process over to our AlbuRx product, which was a product that was manufactured out of Bern. And in doing so, you need the approvals from the regulators for the change in the products. So we're just waiting on the approvals. We're manufacturing the product. So the constriction is really a regulatory issue. It's not anything else. We're just waiting on the approvals from the CFDA so that we can then import AlbuRx into China.

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Mark Dehring, CSL Limited - VP of IR [22]

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Thanks, Lyanne. We have another question on line from David Low at JPMorgan.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [23]

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So I just want to pick up on that Albumin question. So presumably you're building inventories in this period because if volumes are up 3, and I presume throughput of plasma through the facilities is running something closer to 10, you've got inventories that you'd be expecting to move in the second half. Are we going to see some of those sales come through in the second half?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [24]

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Yes. Well, the plan is that you would, David, see those sales start to come through, and that was the plan all along is to make sure that, that did happen. Remembering that, we're talking about growth over the previous period. So we have been putting plasma through the plants. And if you take IG as kind of your surrogate on terms of where we are for production, and you see the increases that we've had in volume. Then you can expect that we're also expecting that Albumin will be growing at about the same rates as IG. As you know we try to manage those leaders carefully. So I would say that we do expect them to come through. Now the timing of the approvals from the CFDA are not up to me. They don't always -- the regulators don't always adhere to my timelines. So once that's done then we expect to see those sales start coming through. It won't all come through in the second half. We'll expect it will probably flow into next year as well.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [25]

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Right. The sales of Albumin for the full year were not going to be at that sort of a equivalent to the IG volume growth this year, but we will see some catchup in the second half?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [26]

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Yes. I would say that's probably a good assessment.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [27]

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And I'm sorry, to be that low, but...

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [28]

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No. No, that's all right. No, I think, that's a good assessment. I wasn't trying to be critical. I agree.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [29]

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So one follow-up then. Just the flu guidance that we have out there, $200 million EBIT for next year, it would seem that you're going to be a long way towards that this year. But I don't quite see you getting to $200 million, but are getting relatively close. What's your thinking about that guidance at this point?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [30]

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I think, I'll keep pushing them. But yes. Look, I think, David, as you know, the second half is loss-making in Seqirus just based on the flow of the product and the seasonality of the business between southern and northern. If we look at the losses, second half last year, a lot of it depends on the returns that we have coming back. So that's the variable piece. We're still not sure what we'll see. We always budget for a certain amount. I won't tell you exactly what we budget for, but we budget for a certain amount, and there's things around that. But I agree that as you look at it, we're making really good progress, and I don't know if we'll quite get to $200 million, but I think we're -- it's a good effort by the team for sure.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [31]

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And if I could just squeeze in for David. The CapEx and R&D guidance that we've been given, requires quite significant uplift in the second half though just to get to the mid-point. So on my numbers, about $100 million uplift in R&D and about $170 million uplift in CapEx. Are we still on track for those guidance, David?

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David Mark Lamont, CSL Limited - CFO [32]

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Yes. We certainly haven't changed those guidance. David, I mean, as we mentioned, on the R&D side of things, we're seeing good progress on 112, and it's the largest trial as you know that we're running and it's the biggest impact into that overall R&D line. So we would expect to see that continue in the second half. And certainly, on the capital side of things, as we have mentioned, it's not a single project. It's multiple projects. We, obviously, manage the projects to deliver against their milestones and there's several things that we're expecting to still come through in the second half of the year. But I would just emphasize, again, that in both of those areas, we don't manage them to the number. We manage the projects. And what we wanted to do is actually efficiently get the projects into production on the capital side of things as quickly as we can and at the lowest cost, and equally, we want to make sure that we're hitting the right milestones on the R&D side of things. So the guidance that we've given is still the guidance that we're indicating at this stage.

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David A. Low, JP Morgan Chase & Co, Research Division - Research Analyst [33]

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So my only comment would be that, what we've seen in recent years in some of these guidance numbers that -- you've come in short of some of these guidance numbers, R&D, particularly. I mean, any reason, this year is different?

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David Mark Lamont, CSL Limited - CFO [34]

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Well, again, we're back on individual projects as, I think, you've heard us say numerous times, at the end of the day, we manage the project. We're not managing to the spend. And it does vary a little bit, clearly on the big trial in 112, it depends largely on the recruitment side of things. And we are continuing with that. We're pleased that we've now got a 1,000 people into the trial, and we'll continue to see a continual ramp-up.

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [35]

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But I'd say, David, just to your comment, we -- when we do budgeting, we do that on an annual basis. As you know, we're managing these products over multi years, and so we're never going to be 100% accurate. And so it's -- there is some float in there, and you'll see lumpiness, which is what we try to explain each half in terms of what the one-offs were or what the projects are looking like. So will we absolutely hit the number? I can't guarantee any of that. Will we be significantly under? I would think not based on the R&D spend and the speed at which 112 is recruiting and the sites that are coming on board. Remembering that we need 1,050 sites globally to be opened, and we're approaching halfway point of the number of sites. Out of the 1,000 patients we've recruited, which is faster than we recruited the first 1,000 for the IIb trial, much faster, we need 17,500 patients. So it's -- there is ways to go, and you'll see a lot of movement on those lines depending on the recruitment and how we go from an R&D perspective. And as David said with the capital projects, these are huge projects that are ongoing, and there is timing on lead time of equipment, et cetera because there's only so many people that make these huge stainless steel tanks that you've seen when you've been on the tours at the facilities. So a lot of things that we're managing as closely as possible, and we'll try to bring our guidance as close as we can to make sure that you can see it in the numbers. But we'll also be transparent, as we have been, and call those out as we go.

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Mark Dehring, CSL Limited - VP of IR [36]

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Thanks, David. We'll move on to Saul Hadassin at UBS. Saul?

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Saul Hadassin, UBS Investment Bank, Research Division - Executive Director & Research Analyst [37]

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Just a quick question on guidance as well. So I just want to touch here -- are you still sticking to the 9% constant currency revenue growth for the group on a full year? Because if that's the case, just given what you need to grow in second half, it implies 7% revenue growth, constant currency, but 18% NPAT growth, constant currency. And I guess, following on from that discussion about the R&D cost, which cost -- you mentioned SG&A, David, but I'm just wondering, does OpEx materially step down into second half to generate that OpEx? How do you do 18% NPAT growth off that amount of revenue?

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David Mark Lamont, CSL Limited - CFO [38]

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Yes, thanks, Saul. So as we said in the presentation, you should take the half on the OpEx side of things as being pretty consistent into the second half, which, if you look back, again, at the trailing period, we did see it slightly down. So that gives you the best indication of where we are. There was a significant ramp-up over the prior corresponding period, as we've articulated in relation to employees and the number of staff that we've actually recruited into the organization, and obviously, they need to be annualized as part of the exercise. Certainly, when you look at the top line, as you know, one of the biggest aspects that also impacts on that is just the seasonality of Seqirus. And we obviously won't be having anywhere near the same level on the basis of, sort of, the 80-20 rule that applies with Seqirus. 80% of the revenue being in the first half, 20% in the second half. And that certainly will be a factor that works its way through. And obviously, the NPAT guidance that we've given also has the aspect in there in relation to both the financing costs and also the tax side of things. And in the first half, we do see that alongside Seqirus, there's a little bit extra on the tax line compared to where we would expect to be at the full year.

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Saul Hadassin, UBS Investment Bank, Research Division - Executive Director & Research Analyst [39]

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Okay. Just following up with you on working capital and particularly gross cash conversions. You mentioned the raw material bill, but actually looking at the accounts, seemingly, receivables and payables have been more material in driving that cash flow conversion rate down. Just wondering, is that a Seqirus-related issue. And do you expect conversion to move back more toward the 100% for the full year?

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David Mark Lamont, CSL Limited - CFO [40]

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Yes. So you hit the nail on the head, Saul, in relation to just where some of that is. So clearly, it's pleasing that we've been able to get the increase in revenue for Seqirus. What does happen is, obviously, December is when we actually had some of those sales, well, the peak of our receivables is still sitting there. Obviously, that gets collected in the second half, and you would expect that side of things swings around as a result. What I can say is, if you look across our overall days sales outstanding, which we monitor pretty closely, you haven't seen any material movement year-on-year. So it is a product after the fact that the revenue line is growing, that it's playing out in relation to the balance sheet aspects of the receivable. On our inventory side of things, we obviously need to pay for the expenses associated with the inventory, and that is going out in the payments line that you see to supplies and also alongside employee costs. And that is up as a result of that, some of that going, obviously, into the balance sheet.

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Saul Hadassin, UBS Investment Bank, Research Division - Executive Director & Research Analyst [41]

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And just very last quick one. You mentioned the very strong growth rate for couple of the high-margin products, being IDELVION and HAEGARDA. I was just wondering, on a trailing half-year basis, I'm just wondering if you saw growth in both of those products coming out the second half of '18?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [42]

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Yes.

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Mark Dehring, CSL Limited - VP of IR [43]

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Thanks, Saul. Next question from Steve Wheen at Evans & Partners.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [44]

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Sorry to keep harping on about Albumin, but I was wondering, if we go back, previously, there's been some slow-down in Albumin around this double invoicing regime that is not introduced. Can I just clarify that the current sort of slowdown in Albumin is unrelated to sort of anything structural from the Chinese government's perspective that is pretty much all related to the transition to the different products and waiting for that approval. Is that correct?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [45]

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Steve, yes. I'd say, that's accurate, that the 2-invoicing system, everything else, it's been through. It's washed its way pretty much through the -- we had the -- what we saw were increased inventories. There were -- there is some slight price pressure. I think, year-on-year, there's probably about somewhere 6% to 7% price decline, and on the trailing period, maybe about 2%. So there is some price there, but it's not -- it's still one of the -- might still be the highest-priced market in the world in terms of Albumin. So it's not horrible. But the mix shift that you saw for us was also there because it is a higher price than Europe, where we saw growth as well in the volumes, as we said, the volumes were up in the half by about 3%. So the volumes were up, price/mix had an impact. But in China, particularly, it's specifically due to our AlbuRx supply coming out of Kankakee.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [46]

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Yes. And just follow up -- follow-on there. The Good Supply License, how does that change for you? And I guess, more specifically, if we could go back to David's comments from how you're recognizing that revenue, how might that look from one period to the next? What sort of adjustments will we need to take into consideration?

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David Mark Lamont, CSL Limited - CFO [47]

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Yes. So Steve, we're still working that through in relation to how we will actually implement the GSP license. But as I mentioned in the slides, at the moment, we effectively recognize the sale when the product leaves our plants in Europe. And then it can take 3 to 6 months until ultimately that product's in a customer's hands. By the time it's on the water, by the time it actually lands into China and gets cleared, obviously, there's an element of stocking that sits there as well. So we will see a shift. Whereby, we will see a decrease in the revenue that we're able to recognize as we transition, and effectively, we're holding that inventory while it's sitting on the water, while it's sitting in China being cleared through customs, et cetera. And so for that period, there will be a knock on our revenue as part of the process. Now we're still working through, as I said, exactly how we will implement and to which regions we bring it to, et cetera. And once we've actually work that through, we'll give a better guidance when we come to the 2020 picture. So what we wanted to do was flag here that there is a shift. We're working it through. And from that side of things, I think, importantly, what we are saying is there'll be no shift to product available -- availability to patients. It literally is -- we're going to be holding the inventory as opposed to our distributor holding the inventory before it ultimately gets delivered to the customer, and therefore, we recognize the sale.

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [48]

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We also needed to do it because it actually brings us more control of our own destiny in China in terms of our ability to interact directly with the customers and not rely as much on third parties that have multiple products that they're trying to sell into the channel. So it gives us that strength in China with our -- the infrastructure that we've built over the past 10 years.

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Steven David Wheen, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [49]

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Last one for me. On Cuvitru, there's -- on the FDA website is showing that's got short. Is that an opportunity for you? Obviously, it is. But I mean do you have the ability from an inventory perspective to take advantage of that shortage with new patient starts?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [50]

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Look, I'd say that -- what would I say? I would say, based on what we try to do at CSL, we try to make sure that we have consistent supply to patients in all the countries we do business in. So I've said last year and at full year, we're working really hard to continue to drive capacity throughout our system. But because of some of the atypical market conditions that we had last year and the year before, we don't have a lot of excess inventory. We are trying to build, which is what you saw impacting the cash lines as well, in terms of build of inventory, which has been part of the strategy. So we'll do our best.

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Mark Dehring, CSL Limited - VP of IR [51]

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Thanks, Steve. Next question comes from Craig Wong-Pan at Deutsche Bank.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [52]

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Quick question on BERINERT. Wondered if you could help us with saying how much sales -- or how sales have compared to previous periods. Either like trailing 6 months or the PCP.

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [53]

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It was down about 10% on the BERINERT line.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [54]

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Okay. And you mentioned that there's been patients moving up to HAEGARDA. Have you seen much impact from competitor product?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [55]

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Not yet. I'd say that they certainly have been out, and their -- Tachi has been out there, and I'd say that it's -- they're gaining some new patient starts, clearly. And certainly, the patients that were on their clinical trial, physicians have kept them on the product if they're doing well. But we're still garnering new patient starts in all the markets where we've launched. So there is an impact in terms of new products coming out, but it doesn't -- you look at the results on HAEGARDA. It's hard to see that it's had a major impact on our ability to continue to grow at this point.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [56]

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And one last question for me. Just with the FX impact, are you able to provide any detail on how that's impacted the earnings line? So Behring (inaudible) quite a split of that FX impact?

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David Mark Lamont, CSL Limited - CFO [57]

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So certainly, the numbers that we've reported do largely align to the Behring side of the business as opposed to sitting into the Seqirus side of things. As was mentioned -- if you look at the prior corresponding period, we did actually have a gain of some $33.5 million, and that was sitting in the G&A line as such. And when you've looked at the current year, as you will see detailed in the expense line side of things, we have a large FX loss this year of -- and it's an unrealized loss at the moment, of some $35 million that is sitting in the finance line. So it is largely attributable to the debt that we have on the books in relation to the private placement that's associated with the Swiss currency that we actually have.

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Mark Dehring, CSL Limited - VP of IR [58]

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Next question comes from Sean Laaman at Morgan Stanley.

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Sean M. Laaman, Morgan Stanley, Research Division - Australian Healthcare Analyst [59]

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Just, I guess, a high-level question. Just thinking about global volume growth in Albumin, looking out mid- to longer term. Paul, what's you view on the ability for that volume growth to keep pace with IG demand?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [60]

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Well, look, I would say, Sean, that if you look out over the next 5 to 7 years, and if you took some of the projections based on the growth of IG, it would be hard for China to really drive most of that demand to keep up with IG. I think, there's -- that's something that obviously, from our perspective, we look very closely at. In the next few years, I think, we're still in pretty good stead. I think, it's just a matter of how far out are we looking. Over time, you could see where IG growth, assuming no disruptive therapies in the IG space, so FcRns, anti-FcRns or Fc mimetics don't have an impact in any of those disease states, I would -- if it was just the world as we look at it today, it would be hard to see that 5 to 10 years from now that Albumin would keep up with the demand for IG. But the world doesn't normally stay stagnant. So I'd say, let's wait and see. But I'd say I'm not -- I think, over the next few years, I think, we're in pretty good shape.

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Sean M. Laaman, Morgan Stanley, Research Division - Australian Healthcare Analyst [61]

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Sorry, if I'm re-asking this but any sense of what plasma costs have done more recently versus last year?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [62]

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Yes, sure. They've ticked up slightly. So you'll see that flowing through, not necessarily on the expense line because it's in our cost of goods and it really -- what we collect today, doesn't really hit our books until next year. But there's a slight tick up because we're still opening new centers. They're much less efficient and more costly when you're staffing a center for very low collection volumes until you get them up to speed up, so that's having some impact. And also the economy in the U.S. is quite strong, and that's impacting the ability to recruit donors without increasing donor fees. So there's a slight increase in some donor fees, I'd say. For us because we are highly efficient, there's an impact, but it's a slight impact to our total plasma cost.

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Mark Dehring, CSL Limited - VP of IR [63]

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Thanks, Sean. Next question comes from Dave Stanton at CLSA.

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David Andrew Stanton, CLSA Limited, Research Division - Research Analyst [64]

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Look, I just wonder within Behring whether there was an impact from losses or gains from -- on these acquisitions, whether they were part of the Behring performance, please?

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David Mark Lamont, CSL Limited - CFO [65]

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Other than the milestone payment that we actually made, which we said was in the R&D side of things, the $25 million for Vitaeris, the rest of the impact is pretty minor, Dave.

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David Andrew Stanton, CLSA Limited, Research Division - Research Analyst [66]

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Very good. And just a follow-up for me. Given the net interest expense was slightly larger than, I think, what most people were going for and perhaps D&A was a bit high. Any chance you can give some clues as to what should we be thinking for the balance of the year?

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David Mark Lamont, CSL Limited - CFO [67]

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Well, certainly, if you look at the D&A, there's no reason that you'd expect any of that to tail off. If anything, there'll be a slight increase as we start to now utilize some of the capital expenditure, principally, in relation to the ERP system. So we are now live across on the Behring side of the things and the Seqirus side of the things in the northern hemisphere. Both Seqirus and Behring still need to implement in the Asia-Pacific region. But as a result of using the system we're starting to see that tick up, which you will have seen was up some 17%. So you'd expect to see a slight increase over the -- in the second half versus the first half as that starts to flow through. And then on the financing side of things, what we are seeing is just some underlying base rate improvement -- increases in costs. So again, I wouldn't expect that there is any shift half-on-half as part of that, recognizing that, as I said earlier, in that finance cost line, there is $35 million of a unrealized FX loss associated with the debt. And you pick where exchange rates are going, and that will dictate how that plays out. But at the moment, we've still given guidance that we see that we've got a headwind of around about $60 million for the year on FX.

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Mark Dehring, CSL Limited - VP of IR [68]

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Okay. Thanks, Dave. Next question comes from Andrew Goodsall at MST Marquee.

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Andrew Goodsall, MST Marquee - Healthcare analyst [69]

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Just back on the raw material. Just that 30% growth there in that raw material just trying to understand if that's actually a sort of higher run rate just in terms of volumes than what you've had previously. Do you see that capable of giving you a little bit of inventory that you've lacked -- or finished inventory that you've lacked previously?

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David Mark Lamont, CSL Limited - CFO [70]

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So Andrew, yes is the answer to your question. It's primarily -- it is, obviously, a product of both volume and cost. And back to the earlier comments around the plasma side of things, we're clearly collecting more plasma at a slightly higher cost. So there is a little bit of cost impact coming through there. But the majority of it is certainly, volume, and it is consistent with what we've said that we need to actually build the inventory of plasma to meet the patient demand. So that's what you're seeing flow through.

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [71]

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That goes a little bit to the previous question on if there are some tightness in the market. I mean, we'd like to have a little bit more buffer in terms of finished goods as well.

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Andrew Goodsall, MST Marquee - Healthcare analyst [72]

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And just SG&A was up pretty significantly around 26%. Is that -- any sort of key elements driving that?

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David Mark Lamont, CSL Limited - CFO [73]

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So as we said, part of that you need to look at is the shift that we talked about in relation to the FX side of things. You also have that step-up in the D&A, and most of that's actually the amortization side of that, is around about $9 million, and that's all sitting in admin as part of that as well, Andrew.

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Andrew Goodsall, MST Marquee - Healthcare analyst [74]

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No particular restructuring against the sales force or...

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David Mark Lamont, CSL Limited - CFO [75]

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No, other than as we continue to launch product, we need to resource that, so that's flowing through as part of the process.

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Mark Dehring, CSL Limited - VP of IR [76]

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Thanks, Andrew. Next question comes from David Bailey of Macquarie.

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David Bailey, Macquarie Research - Research Analyst [77]

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Just one for me. Just in IG, I was wondering if you could just talk to the -- any incremental impact from either HIZENTRA in CIDP or the Carimune conversion you saw in the first half. And then maybe what you might expect that to contribute looking into the second half of '19, and into '20?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [78]

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Thanks, David. Look, I think, that what you'll -- what you see is the overall growth rate for IG, obviously, was a little bit less than if you add up HIZENTRA and Privigen, and that's because Carimune and Sando was going away. So volumes were affected on the Carimune side, but we're trying to replace all that with HIZENTRA and Privigen. The demand for those products is quite high. And so I'd say we'll continue to see that demand grow as we move out. It's -- the CIDP indication is going quite well. But I have to say that the neurology offices are not the easiest place to get into either. And so it does take time to really build that ability to access those physicians. However, the body of evidence is pretty strong and having a subcutaneous option in CIDP, I think, will continue to drive conversion to subcu in a lot of patients. So I think, there's still a lot of growth left in IG. I mean, 17% and 14% growth in those products is tremendous on our core franchise. I know, we spend a lot of time talking about Albumin, which is important, but the largest part of our franchise continues to show strong demand and strong growth, and I think it will continue into, certainly, into the second half and into the next year.

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Mark Dehring, CSL Limited - VP of IR [79]

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Thanks, David. Next question comes from Gretel Janu from Crédit Suisse.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [80]

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I just wanted to clarify one of the earlier statements on margin expansion. So do you anticipate Behring EBIT margin expansion in FY '19?

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David Mark Lamont, CSL Limited - CFO [81]

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So the expansion in FY '19 of the Behring margin, it's that? Sorry, you broke up a little bit.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [82]

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Yes.

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David Mark Lamont, CSL Limited - CFO [83]

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Yes. So what we had said, we would expect to see a modest increase over what we did see in 2018 at the gross margin line.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [84]

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No. So of EBIT margin, not gross margin...

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David Mark Lamont, CSL Limited - CFO [85]

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So it's all -- well, the EBIT side of things clearly, as we have articulated, the bulk of the R&D expenditure is sitting in the Behring side of the business, which we clearly see as an investment into the future. And we've given some guidance around the 10% to 11% of sales for that across the company. We'll sort of incept it. So that does have an impact, obviously, on the overall EBIT margin. And equally, the depreciation and amortization increase also has an impact on that side.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [86]

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Okay. So we should see that tick down a little bit for the full year '19 versus '18?

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David Mark Lamont, CSL Limited - CFO [87]

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Yes. You wouldn't expect -- what you've seen in the first half is indicative of what you would expect to see in the second half.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [88]

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Okay, great. And then just on IG, keen to know what you think is the current market growth rate. And when we have such continued strength in IG demand, you have the fractionation capacity available to continue to meet the rising demand?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [89]

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So thank you. We still see the demand for IG in the high single digits. I think that there's been a lot of reports and some consternation around PPTA data, which I find interesting having been in the -- in this business for quite some time, knowing that, that system of PPTA data is one of the few data sources in this sector. However, it's all ex factory deliveries from manufacturers, a system that was put in place over 2 decades ago when there were shortages. And I wouldn't say that, that's what I base our projections on is PPTA data. I would say that what I base it on is what we see in the markets, coming up from our markets, and we still see very strong demand in the high-single-digits. And our goal as a leader in that space is to grow faster than the market. That includes our investments in fractionation capacity and plasma collection.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [90]

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But where you stand at the moment, are you currently stretched in your capacity to fractionate enough to ensure that you are meeting demand at the moment and in the next 12 months?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [91]

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Gretel, I'd say, yes. We're doing quite well and that's why you see the growth rates that we had in the first half. Certainly, in terms of the fractionation capacity and the finishing capacity, fractionation is flat out. The finishing capacity we're bringing on the modules, we've opened the 4 modules, and we're building the next 2 for IG that we see the demand coming in the future. So I would say that overall, we are keeping up, but we're running full. I mean, we are moving quickly.

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Mark Dehring, CSL Limited - VP of IR [92]

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Thanks, Gretel. Next question comes from Shane Storey at Wilsons.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [93]

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Just looking at what KCENTRA achieved in the U.S., you mentioned a mix of depth and new accounts there. On the new accounts front, could you give us an update maybe on the available growth runway within the U.S. hospital systems specifically? And then on depth, would you say the clinical practice in America has evolved in much the same way as it did in Europe years ago with Beriplex?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [94]

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Look, I'd say it is evolving continually. I mean, as I mentioned earlier, when you launch a product, it doesn't stop there. It's not like you launch, and you're done, and you're looking for the next wave of growth. These things take time and especially in terms of clinical practice where you can remember when we launched KCENTRA, it was the first change in transfusion medicine in the U.S. in about 50 years. So it takes time for people to really understand. Understanding that almost 50% of the use even for warfarin reversal today is still in FFP. So it's -- there's still a lot of clinical practice change that needs to occur in this space. And so we continue to see an expansion of KCENTRA. To be honest, which I typically am, I would say, the -- looking at the growth rates that we had even 4, 5 years ago and thinking, okay, could we maintain growth rate in the teens in terms of percent increase? I didn't know how long it was going to last. So I've actually been very pleasantly surprised that our teams have been able to continue to expand. And it does show that it doesn't happen overnight and this clinical response that -- and clinical practice does take time to change. So I think, there's still a lot of legs based on what I've seen in the marketplace.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [95]

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Maybe one, just final one. Conscious it's been a long call, but just could you help us put a number on what that product achieved in Japan?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [96]

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I'm sorry, I missed that.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [97]

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Just trying to knock down what KCENTRA achieved in the Japanese market?

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Paul R. Perreault, CSL Limited - MD, CEO & Executive Director [98]

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Yes. KCENTRA in Japan has done exceptionally well. That was a product that was requested by the medical community because they didn't have the option and they saw the benefit globally. So we've had, I think, it's close to 2,800 patients already on KCENTRA. So it's been taken up in the hospitals quite significantly.

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Mark Dehring, CSL Limited - VP of IR [99]

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Thanks, Shane. And we have one last question in line from John Deakin-Bell at Citigroup.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [100]

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I'll be brief. Can I just go back to the flu and I think -- and a big swing factor in the second half losses is the return. Can you just give us a sense of the variables when you're forecasting internally, what returns you get, whether it's the mix you've sold or countries and how accurate you've typically been at forecasting the level of returns?

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David Mark Lamont, CSL Limited - CFO [101]

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Look. The first comment is that it does vary year-on-year, depending upon just the nature of the season and how late the influenza season is in the northern hemisphere and what we're talking about here is clearly just the U.S. market because that's where the returns are playing out. And what we do, do is look at, obviously, how much product we see sitting in the channel that we get some visibility on. We also have a look at historical trends. And at the half year, we've taken what we think is the best estimate in relation to the likely returns. But as Paul said earlier, we even today don't know exactly how that has played out. And that is something that comes through in the second half. The only thing that I can tell you is I know we've got it wrong, I don't know by how much, and that's the nature of the business. But in giving the guidance that we have, we've made our best view of what we think the likely level of returns is, given the nature of the season. And also how we see the success of, obviously, the products that we've had into the market. So as I sit here, I don't expect that we will have any material difference between what we have actually provided at the end of December. But acknowledging that I do know that we've got it wrong.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [102]

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And then last year, conceived of what you thought. How did it end up?

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David Mark Lamont, CSL Limited - CFO [103]

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No. We're pretty on the money last year. So there certainly wasn't any significant or material shift. And again, we wouldn't expect too much this year, but we just need to wait and see.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [104]

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Ex the returns, does that give us breakeven in the second half?

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David Mark Lamont, CSL Limited - CFO [105]

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Sorry you broke up, and I didn't...

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [106]

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Ex the returns -- so excluding the returns of the stock, the actual Seqirus business, does that break even or does it actually lose money in the second half?

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David Mark Lamont, CSL Limited - CFO [107]

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No, it loses money. Loses money in the second half.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [108]

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Before the return?

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David Mark Lamont, CSL Limited - CFO [109]

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Yes.

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Mark Dehring, CSL Limited - VP of IR [110]

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Great. Thanks, John. And ladies and gentlemen, we'll draw the meeting to a close. I'd like to thank you very much for your interest in CSL. And good afternoon, and goodbye.