SECTOR - HEALTHCARE

MARKET CAP 87,141 M AUD

HISTORICAL DIV YIELD 1% P.A

Investment Perspective

CSL is one of three major players in the global blood-plasma-derived biotherapies  space. We expect  consistent product  innovation to drive high-single-digit top-line growth in developed markets,  augmented by mid-teen lower-margin sales growth in emerging markets. With moderate operating leverage, this should result in double-digit profit growth during the next few years. CSL is cost-competitive, given its manufacturing scale and a wide plasma-derived product range that reduces unit production cost. Manufacturing know-how drives ongoing, incremental yield improvements. Cost competitiveness and innovation prowess deliver a narrow moat, reflected in returns on invested capital consistently above 20%, well above an under-10% cost of capital.

CSL suits growth-oriented investors comfortable with the inherent risks of the biotechnology industry, including intellectual property disputes and regulatory intervention.

Six reasons we like CSL Limited include the following:

1.  CSL is a global leader.
2. CSL is the lowest cost producer of plasma globally.
3. The revenue outlook is robustly double digit due to the favourable product mix and strong operational leverage and with good long term visibility.
4. Demand for CSL products are not economically sensitive due to their life saving nature.
5. The company has a good track record for successfully launching new products at higher margins and their current product suite is performing
6. The Vaccines business – Sequris – has substantial potential over the medium term.         

COMPANY ORIGINS          

The Commonwealth Serum Laboratories  has been providing Australians with access to medical advances since its establishment in 1916. Originally founded to support  a country at war, their services have since expanded to include advances in insulin, penicillin, vaccines and infectious diseases.

CSL acquired  Aventis Behring (CSL Behring), a global biotech leader responsible for developing therapies to treat bleeding disorders and immune-deficiencies among  others, in 2003. CSL Plasma,  a subsidiary of CSL Behring, is the largest collector of human blood plasma in the world.

The company  can be separated into two main value components, Plasma fractionation, which makes  up 90% of the business and the remaining royalties, R&D and vaccines,  which makes  up the remaining 10% of the business.

STRUCTURAL CHANGES TO THE INDUSTRY

CSL Behring has over 190 plasma collection centres across the USA and Europe, given the cost per litre of plasma collected is a substantial portion of costs  of goods  sold or COGS, doing this efficiently on a large scale is a major competitive advantage. For reference,  CSL’s mature collection centres collect an estimated 100k litres per annum per centre; double that of its nearest competitor.

There are several structural changes that have improved the industry dynamics on a sustainable basis namely;

• Significant consolidation with three companies now accounting for 80% of the market.
• The underlying demand for immunoglobulins (plasma product) has grown substantially exceeding future additional supply infrastructure. In addition, it takes 3-4 years for new plasma collections centres to reach operational efficiency.
• The increase in GDP per capita in China has generated enormous ongoing demand of Albumin. This increase  effectively balances the demand for Albumin and IVIG (Intravenous immunoglobulin) produced per litre of plasma,  a significant development when examined in conjunction with ‘Last Litre Economics’.

They are also the largest global processor of plasma (they produce 18 million litres per annum as compared with 14 million produced by their nearest competitor). Also for several years, CSL has been building its collection network at 20-25 centres per year while its competitors for some unknown reason have chosen not to add to their collection capacity. This creates a real competitive advantage for CSL as it has control over an increasingly scarce resource – Plasma.

CSL have continued  to increase  their competitive edge  through generating substantial revenue from additional products outside of the typically in-demand  Albumin, Immunoglobulins and Factor VIII products. An act, which has generated a Gross Profit margin of almost 60% and EBIT (Earnings Before Interest and Tax) Margins of 34% for the blood fractionation business.

 It is also important to note that due to the nature of this business and patterns of supply and demand when it comes to medicine and medical assistance, CSL’s revenue and profitability is economically insensitive.

IS THE MANAGEMENT TEAM COMPETENT?

The management team has a history of under promising and over delivering, in addition to erring on the side of caution with conservative accounting and frequent disclosure. Their recent investment decisions in both plasma collection centres and expanding  their processing capacity has provided a massive strategic advantage.

Within the industry, they have a reputation for high quality products produced reliably and consistently.