Business Strategy and Outlook
CSL is one of three tier one plasma therapy companies who benefit from an oligopoly in a highly consolidated market. All the players are vertically integrated as plasma sourcing is a key constraint in production. The plasma sourcing market is currently in short supply, however, CSL is well-positioned having invested significantly in plasma collection centres, owning roughly 30% of collection centres globally.
One major threat to plasma products is recombinant products. Recombinants are quickly replacing plasma products in haemophilia treatment despite being more expensive. CSL has an excellent R&D track record and has developed recombinant products for haemophilia. However, we expect revenue growth to slow in the haemophilia segment based on competitor Roche’s successful launch of recombinant Hemlibra. Immunoglobulin product sales are key to CSL.
This market is not yet impacted by recombinants although both CSL and competitors are pursuing R&D in Fc receptor-targeting therapy to treat autoimmune diseases.
However, gene therapy represents the biggest risk to the plasma industry as it aims to cure rather than treat diseases. While the potentially prohibitive cost may result in slow adoption, CSL has strategically expanded its scope via the acquisition of Calimmune in fiscal 2018 and licensing a late-stage Haemophilia B gene therapy, EtranaDez, from UniQure in fiscal 2020.
CSL is the second largest influenza vaccine manufacturer, behind Sanofi, and is on the forefront of changes in influenza vaccines where manufacturing is shifting from egg-based to cell-based culturing. It’s also conducting preclinical testing of mRNA influenza vaccines.
The company has demonstrated good sense for R&D and evaluates spend based on the commercial outlook. The strategy for CSL Behring has been to target rare diseases, a typically low volume and high price and margin business. There is little reimbursement risk in this area or in the vaccine business, Seqirus.
Financial Strength
CSL is in good financial health and can fund all its capital and R&D spending, currently a combined 26% of revenue, as well as maintain a dividend payout ratio of 44% without requiring additional debt. Following the acquisition of Vifor Pharma, financial leverage is expected to increase to 2.3 in fiscal 2023. However, it is forecasted that the net debt/EBITDA may fall within CSL’s target range of 1.0-1.5 by fiscal 2026. This leaves CSL flexible to pursue organic or acquisitive growth opportunities as they present in the evolving biotech industry.
Free cash flow conversion has remained depressed over the last five years as working capital investment and capital spending to add manufacturing capacity was elevated above long-term levels, combined with higher R&D spending. We forecast free cash conversion to improve but still average 52% over the next five years as we anticipate CSL to prefer growing organically rather than acquisitively.
Bulls Say’s
- CSL is investing in both physical capacity and R&D, leaving it well-positioned to take advantage of growth opportunities in the key immunoglobulins market.
- The acquisition of Calimmune’s gene therapy platform in fiscal 2018 and UniQure’s late-stage haemophilia B gene therapy candidate in fiscal 2020 will help defend against emerging competition.
- CSL has a strong R&D track record, and the ongoing rate of investment is ahead of major competitors.
Company Profile
CSL is one of the largest global biotech companies and has two main segments. CSL Behring either uses plasma-derived proteins or recombinants to treat conditions including immunodeficiencies, bleeding disorders and neurological indications. Seqirus is now the world’s second largest influenza vaccination business and was acquired in fiscal 2015. CSL has a strong R&D track record, and the product portfolio and pipeline include non-plasma products as the firm continues to broaden its scope. Originally formed in Australia as a government-owned entity, CSL now earns roughly half its revenue in North America and a quarter in Europe
(Source: MorningStar)
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