Life-changing blood treatments and staggering compound average annual share price growth of 25 per cent since floating on the ASX a quarter-century ago are just a couple of reasons to like Australian biotech company CSL (ASX: CSL).

Morningstar analyst Nicolette Quinn reflects on whether CSL, which this week marks a quarter-century since floating on the ASX, can maintain the gains it has enjoyed since 1994.
Quinn highlights the skill with which CSL's management has predicted market shifts and adapted its product set and business strategy accordingly as the main reason for its long-running success.

"Looking back, they have actually navigated changes within the market exceptionally well, and that talks to why they've been so successful," she says.

When the company listed, it had revenue of $193 million compared, a figure which has ballooned to US$8.5 billion ($12.5 billion) in 2019. CSL is now the third largest publicly listed company in Australia and fifth largest biotech company globally, with a market cap of $111 billion and more than 25,000 employees and sales in nearly 70 countries.

CSL's 10-year share price trajectory

Share price growth CSL

Source: Morningstar

Quinn points to treatments of blood disease haemophilia as an example of management's foresight, where sufferers were traditionally treated by blood plasma. As the companies that provided these treatments shifted to synthetic products that don't require plasma – which are called recombinants – CSL had an early read on what was happening and branched into those areas.

Another example is in the encroachment of gene therapy treatments, which can potentially cure some blood-related diseases and negate the need for treatment. "But this new phase of things from the biotech view … sees gene therapy as having the potential to upset the apple cart of the industry," Quinn says.

Gene therapy poses challenge

Such therapies pose the greatest threat to the plasma industry, which CSL mitigated by expanding the scope of its business with the acquisition of gene therapy platform Calimmune in fiscal 2018. Such foresight partly explains why Quinn lifted her stewardship rating to exemplary from standard a few months ago.

"The plasma segment is very stable and very consolidated globally with only three players and in different areas, it's almost swings and roundabouts in terms of who's gaining and losing market share," Quinn says.

Jay Lee in Morningstar's Chicago office provides research coverage on CSL's closest competitors within the plasma industry. These are Grifols, a Spanish company, and Shire, which is now part of Japan's Takeda Pharmaceuticals after an acquisition was finalised in January. Together, they represent 80 per cent of the market.

Together Quinn and Lee track which segments of the broader industry are changing, and which players are winning or losing in various segments.

CSL has two key divisions: CSL Behring, which generates about 85 per cent of group profits, and its vaccines business Seqirus.

In the biggest component, Quinn says CSL is well-positioned having invested wisely in plasma collection centres, owning about 30 per cent of them globally. These are an important underpinning of Morningstar's narrow moat rating.

The specialist area of plasma collection and fractionation – breaking down collected blood into its various elements – is tightly regulated and has long lead times of up to seven years, which discourages new market entrants.

Across the broader company, Quinn says: "We don't have a radically different view to consensus in the near term, but maybe further out we see slightly slower growth, rather than projecting the current growth rate going forward."

Across the three tier-one companies Quinn and Lee cover, Morningstar's view for revenue growth over the longer-term is between 8 and 10 per cent.

"If the industry's growing at that rate … you can't have all the players growing at 15 per cent over the long-term. Our long-run projections have been brought more in line with our view of market growth," Quinn says.

US, China at opposite ends of revenue spectrum

On a country basis, just under 50 per cent of CSL's revenue comes from the US, where Morningstar expects 10-year revenue growth of 8.4 per cent.

"There are a range of products within CSL Behring, and almost half of them are immunoglobulins, which are used primarily to treat immune deficiency diseases, and where we see CSL gaining market share.”

By contrast, China comprises about 8 per cent of group revenue. But the company's distribution model in China was among one of the changes management announced during its release of fiscal 2019 financial results in August.

This will see a move away from third-party distribution, which will mean a change in when CSL sales into the country are actually recorded on the balance sheet, and indicate a decline in China sales in fiscal 2020. But this one-off number doesn’t mean a change in sales volumes, and will show up correctly in the following year's financial results.

This is one of the things Quinn expects management to reiterate at its annual general meeting tomorrow, where she expects no real changes in guidance from that issued in August.

With a fair value estimate of $210, CSL was trading at $248 at 4.45pm Tuesday.