CSL’s global market dominance in essential biotherapeutic products looks set to continue

About CSL Limited

CSL Limited (CSL, the Group, ASX: CSL) is global biotechnology business that provides lifesaving products to patients in 100 countries and employs 32,000 people. Originally known as Commonwealth Serum Laboratories, CSL was established in 1916 by the Commonwealth Government to manufacture vaccines like insulin and penicillin and vaccines against influenza, polio, and other infectious diseases. These vaccines were necessary to service Australia’s health needs when the nation was isolated from the rest of the world during the first World War. In June 1994, under a Keating-led government, CSL was publicly floated on the ASX at $2.30 per share.

CSL has three business units – CSL Behring, CSL Seqirus and CSL Vifor. CSL Behring develops and delivers therapies for people living with conditions in the immunology, hematology, cardiovascular, respiratory and transplant therapeutic areas. CSL Seqirus is one of the largest influenza vaccine providers in the world. CSL Vifor focuses on the treatment areas of iron deficiency, dialysis, nephrology and heart failure, kidney disease, gastroenterology, and patient blood management.

Plasma collections currently at record levels

CSL Plasma operates the world’s largest and most sophisticated blood plasma collection network with 325 plasma collection centres throughout the US, Europe, and China. Plasma collected at CSL Plasma facilities is the key ingredient for therapies that treat patients in 100 countries by providing them with infusions to replace missing or deficient proteins necessary for them to lead healthy lives.

These infusions are typically regular treatments throughout the patients’ lives because often their conditions are genetic or chronic.

Plasma therapeutics accounted for 70 percent of CSL’s sales in FY23 and 65 percent of gross profit, for a profit margin of 50.4 percent, one of the best margins in the sector. The FY23 operating result for this business segment was US$3.8 billion, compared to US$5.8 billion for the CSL Group. Plasma collections are running at record levels and increased by 31 percent in FY23.

Critical success factors

The reasons for CSL’s long history of consistent earnings growth and high margins are attributable to several factors:

• Barriers to entry are high: It costs a lot to develop, test, and market competing healthcare products, making it challenging for new companies to succeed.
• Life-saving products tend to have considerable pricing power and generate strong margins.
• Earnings remain resilient in difficult economic environments and during periods of soggy economic growth.
• Growing presence in an expanding market driven by long-term demographic tailwinds.
• Structural growth in product demand is supported by chronic obesity which is a by-product of higher living standards and an expanding middle-class.

Reinvesting for the future is the key to success

CSL’s continuous loop of quality research leads to more research which has the potential to create new innovative therapies that generate increasing and recurrent revenue. In FY23 CSL invested US$1.23 billion in R & D, employing 200 researchers who collaborate across 10 countries. This significant reinvestment in the business mitigates the risk of product obsolescence in that new treatments can quickly make existing drugs, therapeutics, and technologies obsolete. R & D investment is set to continue at 10 – 11 percent of revenue. This partly explains CSL’s dividend payout ratio at 43 percent of net earnings, enabling funds to be retained and reinvested in the business to grow future earnings. The other reason is that CSL’s dividend is unfranked and so is fully taxed in the hands of shareholders, often leaving them with a personal tax liability. On the other hand, retained earnings that are reinvested in the business tend to support a higher share price over the medium to long term which on realisation is subject to capital gains tax at concessional rates for individuals.

Successful investment is a long game

The nature of CSL’s business means that management must plan and think decades ahead. It does this by maintaining and evaluating a research pipeline of innovative prospective treatments that are approaching the commercialisation phase. Equally important is the need to have early-stage options available to take their place because of the long lead times before new drugs and therapies can be developed and brought to market.

This long-term mindset should also be adopted by CSL shareholders given the nature of the business. Discerning, value-oriented investors rarely invest in the present, but invest for the long-term future which is why CSL boasts a significant shareholder base that dates back for decades.

CSL management have reaffirmed earnings guidance at 13 to 17 percent growth, and 9 to 11 percent revenue growth for FY24. Management consider that Net Profit After Tax (before Amortisation of Intellectual Property) growth can be sustained at 13 to 17 percent per annum over the medium term. The combination of a healthy earnings growth rate and an ethically sound business should support future share price appreciation.