CSL

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global biotechnology leader specializing in the discovery, development, manufacture, and commercialization of innovative therapies, primarily derived from human plasma, for rare and serious diseases.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

CSL is a global biotech leader, primarily focused on the plasma-derived therapies market with two main divisions: CSL Behring and CSL Seqirus. CSL Behring focuses on the production of plasma-derived therapies for immunodeficiencies, bleeding disorders, and neurological conditions, and accounts for around 85% of total revenues. CSL Seqirus is focused on producing vaccines, particularly influenza, with some of its recent vaccines containing adjuvant technology that enhances immune response. In a sense, CSL is a complex, multi-faceted health business.

Moat Analysis: 4/5

  • Intangible Assets (4/5): CSL possesses a substantial moat primarily derived from its intellectual property and highly specialized manufacturing capabilities for plasma-derived therapies.
    • Patents and proprietary processes: CSL has numerous patents and trade secrets around fractionation and purification of plasma. These technologies are difficult to replicate and create high barriers to entry.
    • Brand reputation and trust: CSL has built a strong reputation over decades for high-quality therapies. Patients and healthcare providers demand safety and reliability, and CSL’s brand inspires confidence.
  • Switching Costs (4/5): Patients, once on a particular therapy, are often reluctant to switch to another treatment due to the complexity and potential risks involved. The fact that plasma therapies often treat life-threatening or rare diseases adds to the switching costs. Healthcare providers tend to stick with known effective solutions due to the inherent risk of change.
  • Cost Advantages (3/5): CSL has achieved a large scale, allowing for some cost advantages in production of therapies. Due to the complexity and specialisation in plasma collection and fractionation, costs can be difficult to replicate, especially with high quality products. They are one of the largest plasma providers in the world and operate in key countries like US and China. The supply of the plasma is limited, and the costs are high, but CSL has established collection centers and supply chains to reduce costs. Scale benefits are more pronounced in the plasma-derived therapeutics business vs. vaccines.

A great portion of CSL’s moat comes from the high barrier to entry of plasma-based products. Collecting and processing plasma is technically complex, highly regulated, and requires massive investment and a high degree of expertise.

  • Network Effect (2/5): There is a limited network effect in CSL’s main product areas, but their platform that connects suppliers and customers may provide some advantage over competitors in the marketplace.
  • Some may argue that while brands can contribute to a moat, especially in the pharma space, they are very sensitive to failure. Any serious side effects, lower effectiveness of the drug, or patent expiration will have huge damage to its competitive advantage. This must be monitored constantly. While CSL has a broad portfolio, the dependence on one or two main treatments could become a weakness if the moat protecting those products deteriorates.
  • The moat around vaccine production is significantly less than for plasma. Many big pharma companies have their vaccines pipeline, and CSL competes with them.

Risks to the Moat and Business Resilience

Despite its strengths, CSL faces several risks that could erode its moat.

  • Technological Disruption: The company’s moat rests heavily on its ability to extract and purify proteins from human plasma. Any discovery of viable alternatives to plasma or new methods of producing therapies could disrupt the business. Gene therapy and RNA-based products are currently being explored as alternatives and present the main long-term risk for CSL.
  • Regulatory Changes: The pharmaceutical sector is highly regulated, and any changes in regulatory standards or approvals could create uncertainty or reduce profits. For example, a change in how a certain drug is approved, or if regulations allow faster approvals, or even restrictions on the use of its drugs, could severely affect profitability. These are always lurking uncertainties that are hard to predict.
  • Competitive Threats: There’s always a threat that other companies might attempt to emulate the way CSL operates and become competitive. A large player, for instance, that has plenty of infrastructure, might try to copy the manufacturing process or build their own blood plasma collection centers, which are the source of CSL’s moat. Even though CSL has an edge due to patents, competition can come up with alternative ways of processing plasma and gain a share of the market.
  • Supply Chain Risks: CSL depends heavily on a steady supply of human plasma, and global events like pandemics, donor shortages, and geopolitical tensions may affect its supply chain and ability to generate products. Their collection centers are very geographically diverse and that might expose them to geopolitical risks.
  • Ethical issues: A segment of the population thinks of plasmapheresis as blood farming or has other ethical objections that could pressure governments to limit collection or put stronger regulations to control its industry. This could hurt the supply of plasma, which has already been volatile in the past few years.
  • Legal Liabilities: Pharmaceutical companies often get embroiled in legal issues. CSL, like other pharma companies is exposed to litigation risk.

Despite all these risks, CSL does have strong resilience in the face of uncertainty. In the past, it had some serious issues with one of its manufacturing facilities not working, but it managed to overcome that and come back to profitability. Companies with great moats can usually navigate through temporary issues and come out stronger on the other side. Also, the demand for its treatments is relatively inelastic because they address rare and often life-threatening diseases. And the company’s ability to maintain high prices with limited competition, should continue to lead to high returns on invested capital for years.

Business Overview

  • Revenue Distribution: CSL’s business can be broadly categorized into 2 segments - CSL Behring and CSL Seqirus. As per their annual report, CSL Behring is responsible for over 85% of total revenue, which is related to plasma-based products and includes:
    • Immunoglobulin (27%): used to treat immunodeficiencies
    • Specialty products (24%): used to treat rare and often inherited diseases
    • Albumin (19%): used in cases of blood loss, shock, trauma, burns, and liver diseases
    • Recombinant products (15%): used for blood clotting disorders
    • Coagulation products (15%) used for blood clotting disorders

CSL Seqirus is responsible for about 15% of total revenues, which are generated by vaccines (mainly influenza).

  • Geographic Distribution: CSL has a global presence with major operations in North America, Europe, and Asia Pacific. In 2023, North America was responsible for 48% of revenue, Europe was responsible for 31%, and Asia Pacific and other regions were responsible for 21%. Their customer base is global and geographically diverse.
  • Industry Trends: The demand for plasma-derived therapies has been growing at a steady rate in recent years. As research improves and the number of patients being diagnosed with rare and complex diseases goes up, this demand should keep rising. Also, countries around the world are starting to recognize the need for better healthcare and are allocating more funds towards drugs and therapies.
  • Competitive Landscape: CSL operates in a niche market with very few large competitors, this means that the market has a relatively high barrier of entry. The main competitors for plasma-based products are Baxter, Takeda, and Grifols. With the addition of the Vifor group, CSL now also has some competition from Fresenius and other companies. While the vaccine segment is more fragmented and subject to greater competition from big Pharma companies like Pfizer, GSK, and Moderna.
  • Margins: CSL’s gross margins have been very healthy in the past, over 50% and in some cases over 60%. However, this has been fluctuating a little bit in recent years because of a large increase in raw materials costs. Operating margins average around 30% over a long period of time.
  • What Makes CSL Different: CSL stands out for its focus on niche plasma-derived therapies for rare conditions, its high-tech manufacturing process, its global and diversified platform, its focus on quality and reliability, and its expertise in immunology and cell biology. It invests heavily in R&D and strives to keep the technological edge. They are a global leader in this space, and competitors have had a difficult time in catching up.

Financial Analysis

  • Revenue and Earnings: CSL has historically had stable revenue growth, with an average of ~10% growth per year over the last few years. Earnings and profits have been more volatile, fluctuating due to production problems and acquisitions, but earnings are showing a good uptrend in the last few years. Overall, the company has a solid revenue and profit growth track record.
  • Cash Flow: CSL’s free cash flows tend to trail earnings. As of the last report, net operating cash was $2.8 billion for the previous 12 months, and capital expenditures were close to $1 billion for the year, giving it a free cash flow of 1.8 billion.
  • Debt: CSL’s debt increased significantly in recent years as a result of its acquisition of Vifor Pharma. Total debt stands at around $11 billion. A debt-to-equity ratio of just over 50% might be concerning to some investors, and should be monitored closely in the future, as further acquisition could worsen the situation. However, management has clearly said that they are focusing on repaying debt now.
  • Return on Invested Capital (ROIC): CSL’s return on invested capital has remained above 15 percent. This is a result of the pricing power given by a strong moat and good operations. The company also has good historical return on equity and return on assets. The new adjusted ROIC calculation, taking into account the amortisation of its acquired intangible assets, was also very impressive, reaching a high of 19% before a slight dip.
  • Management’s Viewpoint on Debt:

CSL management is very focused on lowering the debt levels after the recent big acquisition of Vifor. They are aiming to take debt levels back to their previous target of a 30% debt-to-equity ratio. They have increased dividends, signalling their belief that the company is now on a good track. Also, they have a low interest rate of about 5%, which is good in this environment. The focus now is mainly on delivering synergies from the new acquisition and improving the profit margins.

Understandability: 3/5

CSL is a relatively complex business, but not impossible to understand. Its reliance on human plasma collection and fractionation adds a layer of complexity. Its business lines are easily understandable, but the company’s financials do make it harder to fully grasp the inner workings of the company. CSL also operates in a highly regulated industry, which does make it difficult to predict future policies and laws and how they will affect the business.

Balance Sheet Health: 4/5

CSL’s balance sheet has been relatively healthy in the past, but its debt level has increased recently. It now sits at around $11 billion with a D/E ratio just above 50%. On one hand, this level is elevated when compared to previous years and requires monitoring in the coming periods. On the other hand, the company has a strong cash position, with positive cash generation, and management has indicated that it will focus on paying the debts rather than doing new acquisitions for the time being, so it should be able to reduce this level quickly. Also, the company has a stable business model, and is resilient to downturns. So while some aspects are below expectations, their balance sheet remains healthy overall.