Attending the CSL research and development day can feel like being in a molecular biology lecture. But the presentations are a reminder why CSL’s management deserves respect. Though unmistakably scientists, they’re a rare breed – scientists with business acumen.
In a field full of nasty surprises, there were no major ones, neither good nor bad, for CSL’s research pipeline over the past year. Research and development (R&D), however, is inherently risky.
A decade of well-funded research can leads to a dead end so management needs a keen sense of risk and reward. Chief science officer Andrew Cuthbertson’s ability to ruthlessly cut projects where returns appear limited and direct effort and capital towards greener pastures is second to none.
CSL now has more than 1,000 scientists, 130 of which are dedicated to innovation. R&D spending is expected to top $480m this year, a 12% increase on 2013, and there has been a gradual shift towards high-risk/high-reward projects as the company’s existing products face slower growth in increasingly competitive markets (see Chart 1).
Special attention was given to research for their immunoglobulin treatments (also known as antibodies) which assist patients with defective immune systems. Privigen is one such product, administered at a hospital once per month while Hizentra, an at-home version approved in 2010, is administered once per week. CSL now has approval for a bi-weekly dose making the product more convenient for patients. Improving convenience is where most research is currently being directed.
Immunoglobulins generate around 42% of total revenue but completely novel treatments were the real stars of the show. CSL is widely known for its traditional business of isolating complete products from blood plasma. However, they now have a sizeable division that is dedicated to creating and modifying proteins artificially. These ‘recombinant proteins’ are mainly coagulants used for the treatment of haemophilia.
Although the haemophilia program is still in its infancy, it could come with a large pay-day in the case of Factors VIIa and IX. These proteins are being fused to albumin, a major component of plasma, which is designed to prolong their time in the body before being broken down. Current research indicates the modified versions could last five times longer than existing treatments and also reduce spontaneous bleeding, making them significantly more useful.
It is with some irony then that CSL has had to extend the trial by a year due to a lack of participants. Haemophilia is rare, with only about one instance in every 10,000 births for haemophilia A and one in 50,000 for haemophilia B. The limited number of potential participants has meant recruitment for placebo trials is now highly competitive between different research bodies, which must test a large number of subjects for their trials to be valid.
Ethical reasons aside, with such a small pool of potential customers you may be wondering why CSL funds this research in the first place. The reason is that competitors have margins in excess of 50-60% for these niche products and patients require continuous treatment for life. If CSL can develop medicines with extended half-lives, requiring fewer needle sticks, it expects to take significant market share.
It’s early days, but such next generation innovations will determine CSL’s future growth. The company controls a large chunk of the value chain with their own plasma collection centres, research capabilities and manufacturing sites, operating ‘vein to vein’ as management put it.
With the stock price little changed since CSL’s AGM confirms continued growth and, we recommend you continue to HOLD.
This article contains general investment advice only (under AFSL 282288).
Disclosure: Intelligent Investor staff owns shares in CSL but they don’t include the author, Nathan Bell.