CSL: A true global leader

In the latest of our never sell stocks, is one of Australia’s true global leaders, CSL, or Commonwealth Serum Laboratories. The company was founded in 1916 and was actually part of the Federal Government at the time.

CSL is a biopharmaceutical company that researches, develops, manufactures and markets products to treat and prevent human medical conditions including coagulation (blood) disorders, viral and bacterial diseases, bleeding disorders and other diseases.

The operational businesses include CSL Behring, which focuses on the manufacture of blood plasma and bioCSL, which is centred around influenza vaccines. CSL has manufacturing operations in the United States, United Kingdom, Germany, Switzerland Bern and Australia in Parkville and Broadmeadows. 

CSL is one of three of the main players in the global blood plasma sector, which is a $24 billion industry and represents some 50 per cent of CSL’s revenue.

Its dominant position means it operates with formidable power, scale and low manufacturing costs making it difficult for competitors to replicate their margins.

The acquisition of the Seqirus influenza division means CSL is the second largest global player in that sector.

CSL continues its incredible performances in 2019, bucking negative sentiment to deliver a ‘weaker’ result of 11 per cent revenue and profit growth to $1.25bn.

The company’s dominant position affords an incredible profit margin of 58 per cent, which is met with cash flow conversion nearing 100 per cent of profit. The biggest highlights from the result were from its core immunoglobulin or blood treatment drugs, demand for which increased 28 per cent and 37 per cent respectively, boosted by more approvals and alternate uses being found. This group of treatments represents close to 50 per cent of revenue.

CSL’s influenza division, an acquisition questioned by analysts but which continues to pay off as revenue grew 9 per cent for the first half of 2020. A portion of this revenue related to pandemic treatments, but unfortunately not a vaccine for COVID-19.

The Albumin treatment, again hard for finance educated people like myself to understand, was the weakest performing falling 33 per cent. However, this was due to a change in approach to expanding into the Chinese market, as CSL made the decision to supply direct rather than rely on domestic distributors.

CSL seems to deliver year after year. Even amid this Coronavirus volatility, CSL has managed to deliver a positive return for the quarter.

The company’s state-of-the-art production facilities combined with their extensive blood connection network place them in a monopolistic position within their core market. Management is investing further to consolidate their dominance.

There are huge barriers to entry for new entrants as the industry is very capital intensive it is simply a matter of ensuring they provide a consistent and reliable service to hospitals and Government to maintain or grow market share.

The company’s expansion into emerging markets is only just beginning and if successful will take profits and the scale of the business to another level.

CSL has been able to consistently generate substantial revenue and earnings growth by dedicating up to 10 per cent of revenue each year into research and development, that’s around $900m.

Some unfortunately too few Australian businesses are willing to do. The company is not without risk, however, with recent strength potentially covering off a weaker period of blood plasma collection in the US as social distancing measures increase.

This may see some short-term volatility, which would only make for an attractive entry point for a true Australian and global leader.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.