Human plasma products producer CSL this week demonstrated the qualities that make it the leader of the Australasian healthcare sector.

It is not that its share price relative to the rest of the market over the last year has performed extraordinarily well – which it has. Nor even that the US government decided just this week to place a $US180 million order for its as-yet incomplete swine-flu vaccine. CSL instead proved its mettle by this week promising to hand back $A1.75 billion to investors earmarked to buy its US rival Talecris.

CSL has for nearly a year been battling to buy the firm, the third-largest producer of plasma medicines in the US. However, the US Federal Trade Commission dealt its ambitions a fatal blow late last month, when it argued the CSL-Talecris combination would come to dominate the supply of plasma products in the US. With Baxter International, the three companies control 83% of the US market.

CSL had threatened to continue the fight but in a shock development this week the deal was called off because the parties did not have the stomach for the likely long and costly litigation. This was especially true for Talecris’ major shareholder, private equity firm Cerebus Partners. It has an 80% stake in the troubled US automaker Chrysler and now has a much greater incentive to secure a deal with newer and less dominant players in the US plasma market.

CSL managing director Brian McNamee was nonchalant in his explanation for the share buyback, which kicks off on June 23. He said CSL raised the funds for the transaction and that it would be would be appropriate to return the funds to investors.

With a forecast cash balance this year of $3 billion, some sort of return was always on the cards. But in these straitened times, where debt is in short supply the fears that CSL would hoard the cash until the next opportunity came along were palpable.
Cash does tend to burn a hole in management pockets. CSL still has targets in mind but its decision to hand back the cash shows that it its more than willing for capital markets to stress test its strategy.

Anybody listening?
ASB Bank’s decision last week to hike its five-year mortgage rate to 8% ahead of the Reserve Bank’s decision yesterday sent an important signal – the Reserve Bank will struggle to hold down long-term rates.

What makes the hike especially significant is that it was done against a backdrop of already tightening monetary conditions. During the last couple of months the New Zealand dollar has risen 20% in trade weighted terms.

This is due to a weakening US dollar as well as apparently positive indicators on the state of the economy.

Commodity prices, notwithstanding the sharp fall in traded dairy prices last week, are stabilising. And New Zealand’s population is rising. Figures in May showed permanent and long-term arrivals exceeded departures by 400 in April, compared with a net outflow of 1300 in April last year.

Those planning their OE have deferred it in the face of the economic turmoil, while expatriates are returning home as the opportunities that enticed them offshore in the first place dry up.

The housing market is also showing signs of having reached a trough as figures from Barfoot & Thompson, New Zealand’s largest real estate agent, showed last week.

However, the surge in the dollar is threatening to cut off this optimism at the source. It will crimp returns to the agricultural sector, which has perhaps the greatest potential to pull the economy out of its current funk.

All of this should (and has) resulted in a more benign attitude to interest rates from the central bank, should have kept the lid on mortgage rates and more to the point should have stayed ASB Bank’s hands at least until the Reserve Bank announcement.

ASB was saying to the Reserve Bank its actions mattered little. The official cash rate matters much less than the attitude of international lenders.

A five-year mortgage rate of 8% has historically been a mid-to-late-cycle rate and could weigh heavily on the sort of a recovery in the housing market, depriving the local economy of another key growth driver. The only bright spot from all of this is that that if interest rates continue to rise, the strength of any economic recovery and eventually the dollar should give up its recent gains.

Australia, however, is a world apart from what is taking place on this side of the Tasman. GDP figures last week showed the economy has escaped at least the technical definition of a recession – more than two quarters of negative growth.
The result reflects still resilient exports and improving household consumption.
Even in these difficult times Australia is holding its own.

Richardd Inder is an investment adviser at Macquarie Private Wealth. His disclosure statement is free and is available on request. Clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com