Tim Boreham is one of Australia’s best-known small cap analysts and business journalists.

For all those small-cap drug developers dabbling with test tubes and scrounging for every scrap of capital, the $84 billion market cap CSL (ASX:CSL) is the poster child for what can be achieved.

Once a sleepy government organisation, CSL now has a leading position in the global market for plasma therapies – not to mention a dominant presence in the flu vaccine market.

So how do ASX-listed drug developers such as Starpharma (SPL), Pharmaxis (PXS), Mesoblast (MSB), Neuren (NEU), Opthea (OPT) and Cynata (CYP) grow up to be the next CSL?

By that we don’t mean the next blood derivates group – that would be too tough an ask — but an Australian global drug champion truly in the A league rather than slogging it out in the reserves.

In the case of CSL, it’s a mix of timing, perseverance and an element of luck. On the ‘luck’ front, shareholders were gifted with valuable legacy assets when the company privatised in 1994. Influenza vaccines have always been an integral part of CSL, founded as Commonwealth Serum Laboratories in 2016.

Perseverance? The company has slogged away its core business, which is extracting plasma from donors (predominantly in the US) and turning it into life-saving therapeutics such as immunoglobins.

At the same time, CSL spends up on R&D to expand its portfolio into different, but complimentary, therapies. It has also delved into geographic expansion, notably China, and timing-wise that looks a good bet.

And while CSL tried to take over major US plasma rival Talecris a decade ago, the company’s acquisition strategy has been prudent rather than make-or-break.

The $558 share

In case anyone needs reminding, the then government owned CSL listed at $2.30 in 1994. Bearing in mind the company undertook a three for one share split in 2007, one original share is worth a cool $558 today – a 27,800 per cent increase!

But not everything is going CSL’s way, with investors selling the stock down 4 per cent after the company on Wednesday reported a $US1.16bn net profit, up 7 per cent.

Not even management’s honing of its full-year profit guidance — to the upper end of the previously stated $US1.88-1.95bn — was enough to soothe the market beast.

Product-wise, CSL is a machine of many working parts and investors sharply sold down the stock on selective areas of weakness, mainly in albumin and plasma-derived haemophilia product sales.

Global demand for CSL’s suite of core immunoglobin products remains rock solid, as do sales of its specialist therapies to treat a raft of exotic sounding diseases.

If anything can slow down the pace of CSL’s growth it’s the availability of the core ingredient, plasma. This life-giving substance that transports red and white blood cells through our bodies is obtained mainly from US collection centres.

At the 2017-18 full year results the company pointed to a tighter supply because if anything the company is a victim of the economic resurgence in the US.

Why? There are fewer jobless people willing to donate their sauce.

CSL has responded with an unprecedented round of donor branch openings – 30 to 35 this year – and this looks to be easing the squeeze.

Or should that be squeezing some more?

Where CSL is winning

The results show that sales of the core immunoglobin drugs Privigen and Hizentra grew at 17 per cent and 14 per cent respectively, driven partly by approval for a new neurological indication called chronic inflammatory demyelating polyneuropathy (CIDP).

Overall immunoglobin sales grew 12 per cent because of the phased effect of an older therapy Calimune being taken off the market.

Immunoglobin sales account for about half of the sales of CSL’s core CSL Behring plasma arm — $US3.468bn in all.

“We are the global leader in immunoglobin and continue to hold this position despite intense competition in the market place,” CEO Paul Perreault says.

Still, specialty products didn’t let the side down either, with sales growing by 13 per cent to $US803m.

Last year CSL launched Haegarda, for patients with hereditary angioedema (severe swelling of the face and throat). As a result of what Mr Perrault dubs the most successful launches in the industry, Haegarda sales tripled.

Kcentra was no blushing violet either, with sales up 19 per cent. Kcentra is a prothrombin complex concentrate used to reverse urgently the effect of blood thinning drugs such as Warfarin.

“In the last 24 months we have issued five major products which is really unprecedented in the industry and in my career,” Mr Perreault says.

And where it’s not …

But not everything is going CSL’s way, a key blot on the books being a 4 per cent decline in albumin sales (albumin is the protein that makes up 60 per cent of plasma, used in critical care situations including fluid resuscitation).

Management insists the reasons for the slump are transitory, including temporary Chinese import restrictions and production bottlenecks relating to some packaging issues.

CSL also saw an uptick in raw material costs, partly reflecting the increased plasma collection expenses. This contributed to payments to suppliers and employees increasing 15 per cent to $US3.28bn.

CFO David Lamont notes: “We are clearly collecting more plasma at a higher cost but the majority is volume.” In other words, the company is building its inventories, which grew by 30 per cent to $US938m.

Seqirus earnings nothing to sneeze at

A highlight of the result was the ability of CSL’s flu drug arm (formerly CSL Biotherapies) to generate a $US300m underlying profit on $US949m of revenue, up 21 per cent.

In the first half of 2017-18 the division made $185m and three years ago it was losing $US200m a year.

A decent Northern Hemisphere flu season has helped. But the numbers also mix a product shift to new quadrivalent doses that, as the name suggests, treats four different strains of the drug.

In particular, Seqirus also reports early runs with the quadrivalent product Fluad, the only recommended dose for those aged 65 or more.

Because of seasonality, Seqirus does 80 per cent of its business in the first half and as a result it’s expected to be a loss maker in the second half.

In the lab

CSL expended a chunky $US391m on research and development during the half, up 13 per cent.

At its December R&D strategy day, management highlighted focus on five key areas: immunology/neurology, haemophilia/thrombosis, transplants, respiratory and cardiovascular/metabolic.

While broad in scope, these conditions don’t fall far from CSL’s tree of expertise but they are enough to open vast potential new markets.

Most of the R&D cash is being spent on phase three trialling of CSL112, a novel protein infusion therapy aimed at reducing recurrent cardiovascular events following a heart attack.

The trial is humungous: 17,400 patients across 40 countries, with the first patient enrolled in March 2018 and 1000 participating to date.

Compare the breadth of that trial to your average phase three for an ASX trial, which would be lucky to enroll a couple of hundred guinea pigs.

Dr Boreham’s diagnosis

CSL remains one of those rare stocks with an almost assured growth in demand for its product – come rain, hail or recession.

At the periphery, CSL’s growth will be influenced by the pipeline of new products and the progress in China. But in essence if CSL can keep doing what it’s doing – and executing well – that should justify the $84bn market valuation.

For the up and coming drug developers, Mr Perrault’s comments hold some handy advice.

“Me-too products in a crowded space are not going to make it in today’s environment – governments won’t pay,” he told The Australian newspaper. “You have to differentiate and innovate for patient care and reduction of cost in the healthcare system.”

In other words, bear in mind just the unmet patient needs – of which there are many – but the sort of therapies funders such as governments and insurers will actually pay for.

 

 

A different version of this column first appeared in Biotech Daily

Disclosure: Dr Boreham is not a qualified medical practitioner and does not possess a doctorate of any sort. He owns a modest wad of CSL shares but not acquired at $2.30, sadly.

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