Dr Boreham’s Crucible: Why CSL is the poster child for most junior drug developers

If this columnist received a dollar for every time he heard a biotech minnow referred to as ‘the next CSL’, he would be even richer than if he had subscribed to the blood products group when it privatised and listed at $2.30 apiece in 1994.

CSL (ASX:CSL) shares are now trading at a record $331 a share and, allowing for a three-for-one share split in 2007 the original shares are worth close to $1000 each.

Indeed, the company has made quietly multi-millionaires of former staff availing of the employee share scheme, in what turned out to be the ultimate ‘get rich slowly’ scheme.

Now the country’s second biggest listed stock behind only the Commonwealth Bank (ASX:CBA), CSL is the poster child for most junior drug developers.

But how does a stock like Starpharma (ASX:SPL), Pharmaxis (ASX:PXS), Opthea (ASX:OPT), Immuron (ASX:IMM) or Immutep (ASX:IMM) become the next CSL?

CSL’s success can be boiled down to a number of factors – and well beyond the fact that four of the nine board members have Australia Day gongs.

True, CSL is well managed and has had a notably stable executive team and board.

The company has remained focused on its core areas of crucial life-saving plasma-derived products and flu vaccines. But it has also used its clinical starts to develop relevant adjacent products.

CSL has not gone overboard on raising dilutive capital. After a spate of share buybacks there’s a modest 453 million shares on issue.

The company is also willing to anticipate demand and spend on capacity ahead of time. It’s active in the lab and will spend well over $1bn on research and development this year.

Finally, CSL has had a decent dose of luck, having long held an entrenched position and having benefited from weak competitors at times.

And of course — and in hindsight — the then Keating government wrapped the company in a bow and gifted it to investors in 1994.

So how do you pick the next CSL? You probably can’t, although holders in the runaway $1.3bn drug developer Clinuvel (ASX:CUV) may feel they are onto the next big thing.

CBA versus CSL

Justifiably or not, investors are ascribing a supersized valuation to CSL relative to the so-called Big Four banks that have long cluttered the ASX top 10 rankings.

On the same day CSL bared all, the Commonwealth Bank of Australia disclosed a $4.477bn interim cash profit compared with CSL’s $US1.248bn ($1.85bn).

Yet, with a circa $150bn market capitalisation, CSL is not far off the $156bn ascribed to CBA, Australia’s biggest listed company.

This means that CBA shares are trading on a price-earnings multiple of 17 times — high for a bank historically — while CSL is on around 48 times.

For the record, CSL is the fifth biggest global biotech company and its plasma arm CSL Behring is the biggest in the $30bn a year plasma industry

What’s the fuss about?

CSL makes an array of products but the core of its business is simple: the company collects blood plasma, notably from centres in the US where donors are paid for their claret, and slices and dices it into specialist therapeutics.

Plasma is the substance that carries red and white blood cells through the body so it’s kind of, like, important.

The therapies are relevant for disorders such as haemophilia, primary immune deficiencies, hereditary angioedema and inherited respiratory disease.

In the immunoglobin bracket, leading products are the intravenously-delivered Privigen and the subcutaneous Hizentra.

Coagulation products include Idelvion, an albumin fusion protein cited as the new standard of care for haemophilia B.

CSL’s albumin range includes Alburx and Albuminar, used for purposes such as replacing blood loss after trauma and surgery. Albumin is a protein derived from blood (and also found in egg whites).

Specialty products include Haegarda, an esterase inhibitor for hereditary angioedema (severe swelling of the face and throat) and Kcentra for urgent warfarin reversal (that is, when a patient on the blood thinning medication is bleeding to death).

This week, the US Food & Drug Administration approved Privigen for the investigational treatment of the autoimmune disease systemic sclerosis.

The flu vaccine arm was formerly known as bioCSL but was re-named Seqirus after CSL bought the flu vaccine business off pharma giant Novartis in 2015.

Seqirus is Latin for ‘made up name because all the sensible ones were taken’.

Seqirus sells season vaccines such as the quadrivalent Flucelvax that is effective against four strains and the adjuvanted (supercharged) Fluad for high-risk populations.

The company cites a seasonal vaccine market of $US4bn, or 500 to 600 million doses (150 million in the US).

Just popping down to the (blood) bank

CSL is perceived as a no brainer business because a growing population will ensure a market of sick people in need of the therapeutics.

As Dracula would attest, efficient plasma collection is the key and there’s a dark art in terms of centre location. CSL claims to be the best in the business and who are we to argue?

Currently CSL has 235 collection centres mainly in the US, but also in Germany, Hungary and China.

The company opened 30 new US centres in 2018-’19 and a further 20 in the December half, bank on target for 40 openings for the full year.

According to broker Citi, the four plasma collectors opened 67 US outlets in the December half, with CSL accounting for 28 of them.

Dissecting the results

After revealing a 7.5 per cent profit surge for the half year and upgrading full-year guidance, CEO chief Paul Perreault last week was keeping the proverbial lid on it.

But only just.

“We expect strong demand for our therapies to continue and we expect to outpace the market as far as plasma collection is concerned,” he said.

CSL’s half-year profit bounce was underpinned by the 10 per cent sales surge for the core Behring division.

In particular, sales of immunoglobin products rose by 26 per cent, with Privigen turnover up 28 per cent and Hizentra sales soaring 37 per cent.

Demand for primary immune deficiencies remains robust, but the company also benefited from Privigen and Hizentra being approved in the US for chronic inflammatory demyelinating polyneuropathy (CIDP), a rare neurological disorder.

The key weakness was a 33 per cent decline in albumin-based products, owing to a change in distribution arrangements in China. This disruption had been well flagged and should already have been accounted for in analysts’ spreadsheets.

“Sales are expected to return to more normalised levels in 2021,” Perreault says.

CSL’s fortunes are also being bolstered by the fortunes of the Seqirus division, with revenue up 9 per cent to $US1.018bn.

In particular, both quadrivalent and adjuvanted doses rose by 21 per cent, bearing in mind the seasonal nature of the division (the northern hemisphere winter falls largely in the December half).

Ahead of the results, management guided to net earnings of $2.05-2.11bn for the full year to June 2020.

Despite the albumin issue and supply constraints in some specialty lines, management has cheerfully upped guidance to $US2.11-2.17bn (up 10-13 per cent on the previous year).

Sizing up the rivals

It’s sometimes easy to forget that CSL does have competitors, notably Takeda, Grifols, Octapharma and Baxter.

But Perreault says CSL isn’t striving for world domination because it can’t service all the demand.

He notes that when you become entrenched in a market, patients are loath to change if you have shown reliability of supply.

“We launched the first subcutaneous IG (immunoglobin) product in the US in 2005,” he says.

“It’s taken us from then until now to grow the primary immunodeficiency to half the (patient) population.

“We think we are clearly the market leader in subcutaneous. We have a great product for patients but it has to be the right patient and it has to be able to be administered at home.”

What’s cooking?

There’s plenty of stuff bubbling away on the Bunsen burners at CSL’s Bio21 research hub at company HQ in Melbourne’s leafy Parkville.

For a start, CSL is halfway through a massive $800m clinical trial of its experimental heart drug known prosaically as CSL112 (a plasma-derived infusion therapy).

The phase III trial has enrolled 7000 patients across 90 hospitals in 46 countries. In all, 17,000 are expected to enrol and as far as clinical trials go it doesn’t get much more expansive and costlier than this.

It’s aimed at 10 per cent or so of heart attack victims who have a second attack within 90 days of the first – often fatally.

The trial is seen as binary – it will work or it won’t. Expect the results of a “futility analysis” at CSL’s August full-year results.

If CSL112 were to be brought to market it would be worth billions.

CSL also has a phase I trial of an asthma therapy – let’s call it CSL311 because that’s what it’s named  – aimed at zapping the agents that inflame the airways.

This one targets 235 million asthma sufferers, notably children.

CSL is also developing Privigen and Hizentra as a treatment for scleroderma and Hizentra for dermatomyositis.

As for new therapies, the non-exhaustive list of targets includes sickle cell anaemia, contact-mediated thrombosis, diabetic nephropathy, neutrophilic dermatoses, systemic lupus and erythematosus.

My there are a lot of ailments in the world, aren’t there?

Dr Boreham’s diagnosis

CSL shares have had a monster 12 months and are now trading at a record $331 a share, compared with $188 in February 2019. Five years ago they traded at a “mere” $88 or so.

Are CSL shares now overvalued? Given the lofty earnings multiple the stock trades on, the obvious answer is yes.

But we thought the same when the stock was trading at $30 … and then $100 … and then $200.

Beyond commercialisation of the heart drug, it’s hard to see a transformational ‘big bang’ event for CSL, such as a mega acquisition.

As with fellow home grown hero ResMed (ASX:RMD), it’s all about developing extension products and some new ones as well. If a fraction of the stuff at bio21 works out, CSL could well become Australia’s biggest company.

In the longer term, gene therapies may well supplant some plasma-based therapies — but that’s a bit like saying air travel will be replaced by transmat beams or the like.

“I wouldn’t be opening more plasma centres if I didn’t think growth in demand wasn’t going to continue,” Perreault says.

Disclosure: Dr Boreham is not a qualified medical practitioner and does not possess a doctorate of any sort. But he does own a modest wad of CSL shares, acquired at somewhat north of $2.30 a share.

This column first appeared in Biotech Daily.

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