Under the Spotlight AUS: CSL Limited (CSL)

More than a century ago, global trade was disrupted by World War I and Australia’s supply lines for pharmaceutical goods dried up. So in 1916, the government decided to establish Commonwealth Serum Laboratories as a federal department to prepare vaccines, serums and antitoxins locally.

The department produced insulin, diphtheria vaccines and smallpox vaccines. It also played a key role in making penicillin during World War II. There was even an animal health unit. By the 1950s, the laboratory made a range of medicines and polio vaccines, and became known for its antivenom work.

As international business channels opened up again, and improved cold chain logistics made it easier to transport medications, competition grew. And with increased competition, the importance of intellectual property for treatments that cater towards large numbers of patients also grew. But with few of its own products, the department’s place in the pharmaceuticals industry became less certain. However, the department was able to overcome these challenges and go from strength to strength, all the while remaining at its original site, which was initially farmland on the edges of Melbourne. The first employee and founding director, Dr. William Penfold, had moved into a cottage with his family and shared the land with over twenty horses. Today, about 2,000 employees commute to this location in Parkville, where they develop potential flu vaccines for the Asia-Pacific region. This is only part of CSL Limited’s ($CSL) global workforce of more than 32,000 and a network that serves patients in more than 100 countries.

Full treatment 

The biotechnology firm is one of the largest by market cap on the ASX and has fostered a reputation for stable growth. It was privatised in the early 1990s and the whole business was listed on the ASX in 1994 at $2.30 a share. With a very limited commercial market and no other local blood product manufacturers at the time, the firm’s competitive environment did not change immediately. In fact, as part of the IPO, the federal government arranged a 10-year contract with the company for it to manufacture blood products for Australia.

Blood plasma products remain at the heart of CSL. Through a process known as fractionation, blood can be separated into several components, including red blood cells, white blood cells, platelets and a yellow-looking liquid called plasma. The proteins within plasma are further divided to create therapies that can help with immune deficiencies, hereditary bleeding disorders and critical-care medicines.

CSL cemented itself as a top player in a fragmented market with the acquisition of Swiss plasma company, ZLB Bioplasma AG, in 2000. When CSL had an oversupply of plasma a few years later, the firm also took over the therapeutic protein unit in rival Aventis. It was a major acquisition, which helped expand the company’s product range and provided a clear foothold into the international market.

The Aventis takeover laid the foundations for the current business unit within CSL known as Behring, which develops therapies for rare and serious diseases. This unit accounted for 63.1% of FY2023 gross profits, making US$4.58b. The remaining US$2.67b of the company’s US$7.25b profits came from CSL’s two other business units, known as Seqirus and Vifor.

Innovation injection

Fractionated blood products Privigen and Hizentra are the main contributors to Behring’s revenues. These provide the missing antibodies that can be used in treatments for inflammation, infections and disease. Other offerings help patients whose blood doesn't clot properly. Behring also supplies specialty products such as the albumin protein found in human plasma, which supports blood volumes and blood pressure in specific cases such as heart surgery, shock or liver disorders. 

Facing strong competition in this space from firms such as Baxter International ($BAX), CSL explored other areas of growth, ultimately going back to its roots and buying Novartis’ ($NVS) influenza vaccine business in 2015. This purchase came with a valuable research and development pipeline and was significant for the creation of CSL’s Seqirus unit. Seqirus manufactures egg and cell-based vaccines, as well as researching new mRNA options. 

The COVID-19 pandemic period was complex for CSL. Its blood plasma collections were disrupted, resulting in a significant but temporary decline in one of its major revenue streams. The company had worked on a COVID-19 vaccine with the University of Queensland, but efforts were abandoned after trials showed false-positive results for HIV. Instead, the firm used its facilities to produce the AstraZeneca ($AZN) vaccine and became an important local supplier. 

Vital signs

CSL’s previous deals have been transformative for the business and there’s a lot of pressure on management to make sure the US$11.7b purchase of Vifor Pharma in 2021, which extended the firm’s reach into treatments for iron deficiencies and kidney disease, has a similar impact. 

Some shareholders have already raised concerns about when the takeover will start to pay off. Around 23% voted against CSL’s most recent remuneration report, which excludes from bonus targets the impact of Vifor on the business.

Furthermore, news that Ozempic, Novo Nordisk’s ($NVO) diabetes-turned-weight-loss drug, might delay the progression of kidney disease in diabetes patients, has not helped CSL.

The fact that CSL has several patents expiring in the coming years and will face increased competition from generics could weigh further on the stock. The firm’s reputation as a stable dividend payer could also be at risk if its competitive advantages decline. 

The healthcare sector is typically seen as defensive, being a place of relative stability during volatile periods in the stock market. Yet this characteristic has not been as obvious in 2023, with labour shortages, inflation and high competition affecting firms.

CSL has not been immune from this turbulence with its share price fluctuating significantly, leaving many wondering if now is a buying opportunity or if there are greater troubles ahead for the company. Only time will tell if CSL can develop the right treatment for its current predicament.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.