CSL Ltd (CSL) – Meeting Notes
Reach Markets publish the notes from our analyst meetings with company management. They should be read in conjunction with the research we’ve completed. Reach Markets endeavour to provide self-directed investors a seat at our investment meetings. We publish these notes in a conversational format to get these out as quickly as possible for your consumption.
We recently had a one-on-one meeting with Mark Dehring, Head of Investor Relations from CSL Ltd (CSL). The meeting was used as a refresher on the CSL story as well as to reassess our investment thoughts on the Company. Below are the key points from our discussion.
Porter’s five forces model
CSL’s core business is plasma therapeutics (plasma fractionation), in which the threats to new entrants are very low as it is difficult for new entrants to get hold of the plasma out of the U.S., so the industry has got enormous barriers to entry. There are even economic barriers to entry like high cost (to get into the business it requires to build a minimum $2bn fractionation plant, which would take 5-7 years to build, then another 5 years to run clinical trials, so it takes about 10 years before the product is out and then the issue of sourcing of raw materials like plasma becomes a question).
Moreover, the threat of substitutes for CSL’s core products like immunoglobulin (49% portfolio share) and Albumin (12% portfolio share) is negligible as these cannot be produced synthetically and CSL’s speciality products are not substitutable because of rarity of the disease they are used for (pharma companies don’t want to spend millions of dollars to develop a product (orphan drug) which is only required by a handful of people).
Further, the strength of CSL also lies in that their products are natural and are derived from the human body. This minimises the risk of harm relative to pharmaceuticals which may have drugs derived from plants and have toxic ingredients.
Products – widest portfolio compared to competitors and extra products on top of albumin and immunoglobulin improves margins
CSL is monetising 20 of the major proteins found in human blood, the significant ones being immunoglobulin and albumin on which Mr. Dehring noted in the words to the effect of, “last year we put about 14 million litres of plasma through our manufacturing spine and we took out immunoglobulin and albumin. You can buy the plasma in market for $160/litre which costs about $80 to convert and $20 for working capital cost. It takes about 9 months to take it out from someone’s vein, process it and put it back into someone else’s vein and the working capital cost is actually quite high…so we have $260 of cost at gross margin line per litre of plasma. Grifols is paying this amount of money but our cost is much cheaper. We get 25gm of Albumin (selling at $3 per gram) and 4gm of immunoglobulin (selling for $60 per gram) out of each litre of plasma, so 1 litre of plasma earns us $315.”
On top of the two core products, CSL has a big portfolio of speciality products like alpha1, Kcentra etc which Mr. Dehring described as ‘icing on the cake’, which helps CSL earn extra revenue on top of what it earns selling its 2 core products.
Growth catalysts to focus on
The company considers 4 of its products as growth catalysts going forward;
1. Idelvion (used for treatment of Hemophilia B) is one of its best product on the grounds that it is only needs to be administered once every two weeks as compared to its substitutes, which have to be taken 3 times a week (i.e. it is less painful for patients as they are required to inject less times). Idelvion has a market size of $1.3bn, of which CSL owns 1/3 and expect to grow it to 50%.
2. Haegarda, which is used for prevention of Hereditary Angioedema, has significantly reduced the bleeding (patients were bleeding 50% of the time to now only bleeding 5% of the time).
3. Kcentra for which CSL has sole right to command (orphan drug status) by FDA, which means CSL own 100% of the market share.
4. Hizentra, which is used for treatment of patients with Chronic Inflammatory Demyelinating Polyneuropathy (CIDP).
CSL112 – a gamechanger
In his concluding comments Mr. Dehring talked about CSL112, which he called a ‘gamechanger’ noting in the words to the effect of, “we have moved in phase 3 and we have our first futility in 2020, which means a third party will looks at the data and they would say CSL stop wasting your money this is going south. If they say nothing than that’s great and we’ll continue…what we don’t want is messy data…the first efficacy data which is like a half way point is in 2021 and then in 2022 we are looking at complete data and then hopefully in 2023 we get FDA approval and launch it into the market.”
Patents protection of products minimal; manufacturing process is key to higher margins
Dehring noted in the words to the effect of, “patents matter in the industry, however with these products it’s hard to get patents. We can try and patent manufacturing processes but the reality is that patents are only good for us for a certain number of years anyway and then you hit the cliff. So the good news is that if there are no patents there is no cliff, bad news is we don’t have that protection…we do have lots of patents and depends on which part of the business for example in flu business we have got patents, for some of our antibodies we have patents but for bulk of our business we don’t have patents.”
Operating efficiency is a function of efficient manufacturing process + efficient standardised collection centres
CSL has the best margins in the business and its collections business is run very efficiently. CSL is targeting 30-35 collection centre openings in 2019 (27 in 2018). Each centre approximately provides 100k litres of plasma. The FDA requires the centre to be fully staffed upon launch and it takes 2-3 years to ramp up.
The company has 206 collection centres in the U.S. (8 in Germany, 4 in China, 3 in Hungary) and whenever they set a centre up its standardised (same as the existing centres), so they can easily move staff around centres without them undergoing any additional training. Moreover, CSL’s plasma collection process is around 90 minutes compared to competitors, which have a collection process of 2 hours.
CSL also has recipients of their products (patients) and doctors visit their collection centres to talk with donors about how important their blood is. Collection in the U.S. remains the key as most other countries are willing to allow their citizens to receive CSL products as FDA provides oversight in the U.S.
The donor base is 25% unemployed and 75% employed. As the U.S. economy is booming CSL faces inflationary cost pressures as the donors and the staff have started to demand more money. U.S. wages are going up. The question for donors who receive ~US$45 per visit (and who can donate 2-3 times per week) is whether the payment is greater than their hourly wage.
In our view CSL still remains at an advantage due to its high efficiency as the inflationary pressures would be hitting its competitors much harder due to low efficiency.
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
Reach Markets Disclaimer
Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing email@example.com.
Read our full disclaimer here >
This publication contains general securities advice. In preparing the advice, Reach Markets Australia has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Reach Markets Australia and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. Reach Markets Australia does, and seeks to do, business with companies that are the subject of its research reports. Reach Markets Australia believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Reach Markets Australia or any of its directors, employees or agents. This publication must not be distributed to retail investors outside of Australia.
It is recommended that you seek independent advice and read the relevant Product Disclosure Statement before making a decision in relation to any investment. Any advice contained in this communication is general and has not taken into account the investment objectives, financial situation and particular needs of any particular person.
Banyan Tree Disclaimer
This document is provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Banyan Tree is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Banyan Tree does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Banyan Tree, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Banyan Tree is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Banyan Tree does not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Banyan Tree.
This document has been commissioned by Reach Markets Australia Pty Ltd and provided by Banyan Tree Investment Group (ACN 611 390 615; AFSL 486279) (“Banyan Tree”).