CSL Limited (ASX:CSL)

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Sam Raasch

Geoffrey Jordan

CSL Limited (ASX: CSL) is an Australian biopharmaceutical company that specializes in rare medical conditions. It mainly produces immunoglobulins (proteins that fight foreign objects including bacteria and viruses) and antivenins (antibodies that fight venom) but the company also has a strong foothold in the plasma fractionation industry. Plasma fractionation is the separation of blood components, which are used in various biotherapies. In fiscal 2010, CSL Limited generated $4.5 billion in revenue, a 10% improvement from the prior year.^[1]

The launch of Privigen, an intravenous immunoglobin, increased the overall sales of immunoglobins by 26%.^[2] This immunoglobulin can be kept at room temperature, unlike most other antibody drugs. CSL Limited plans to transition from lyophilised (frozen) to liquid drugs, potentially broadening the company's market base to places that lack sufficient energy for freezing facilities.^[3]

CSL Limited notably produces and distributes Gardasil, a Merck (MRK) vaccine that prevents numerous strains of the human papilloma virus (HPV), in Australia and New Zealand. HPV commonly causes genital warts and it one of the few viruses known to cause cancer, specifically cervix and vaginal cancers. Sales of Gardasil decreased by 23% in 2009 due to the end of the initial vaccination phase offered to all women from ages 9-26.^[4] Gardasil represents 4% of total sales.^[5]

Company Overview

CSL Limited is a biopharmaceutical company engaged in the research, development, manufacture, marketing and distribution of biopharmaceutical products. It operates in three segments: CSL Behring, which is engaged in manufacturing, marketing and developing plasma products; Intellectual Property Licensing, which is engaged in licensing to unrelated third parties of intellectual property generated by the Company, and Other Human Health, which comprises CSL Bioplasma and CSL Biotherapies. These businesses manufacture and distribute biotherapeutic products. It operates in Australia, United States, Switzerland and Germany.^[6]

In terms of geography, North America is CSL Limited's leading customer, with 38% of sales. Europe follows with 30% of sales, Australia with 15%, and others with the remaining 17% of sales.^[7] In terms of product sales, CSL Limited's immunoglobulins generated the largest amount of sales (34% of total sales) while plasma-derived coagulants generated 16% of total sales. The hemophilia drugs Helixate and albumin together generated 23%, Gardasil generated 4%, and the rest of CSL Limited's products accounted for another 23% of total sales.^[8]

CSL Limited invests heavily in its Research & Development, $317 million investment in fiscal 2010.^[1] The R&D budget focuses on protein-based medicines aimed at treating hemophilia and other serious diseases. Privigen, as well as the H1N1 flu vaccine, demanded the bulk of the R&D endowment in the 2008-2009 year. ISCOMATRIX adjuvant, used to modify the immune response to antigens in vaccines, also garnered a large share of the R&D investment.^[9]

Business and Financial Metrics

Fiscal Year 2010 Results^[1]

CSL Limited announced profit after tax of $1,053 million for the twelve months ended June 30, 2010. This result included an unfavorable foreign exchange impact of $187 million. On a constant currency basis, operational net profit after tax grew 22% after excluding one-off non-operational items in fiscal 2009.

Total sales revenue was $4.5 billion up 10% on a constant currency basis. Global sales and fill & finish activities relating to CSL's pandemic influenza vaccine (H1N1), totalled $235 million. During the year, CSL reported research and development investments of $317 million, up 10% on a constant currency basis. Cash flow from operations was $1,168 million, up 14% from the prior year. CSL maintained a strong balance sheet, with $1,001 million of cash and debt of $462 million. CSL increased its divided 13% to 45 cents per share. Total ordinary dividends for the year were 80 cents per share, up 14% from the previous year.

Business Segments

CSL Behring (82% of sales in 2009)

This is the largest grossing segment of CSL Limited. Focusing on plasma-related diseases and defects, CSL Behring has created a niche in blood biotherapy. It is estimated that 1 in every 10,000 births results in a hemophiliac, and 18,000 American citizens presently live with the disease.^[10] Hemophilia refers to the inability to clot blood. In consequence, minor cuts can cause a hemophiliac to bleed out if not taken care of immediately.

The liquid immunoglobin Privigen bolsters CSL Behring's product set along with Vivaglobin, a self-administered immunoglobulin. New Privigen facilities are expected to expand the drug's sales in future years. Helixate, a drug that treats hemophilia A, is also considered a company staple.^[11] Liquid immunoglobulin has also been linked to reduced risk of Alzheimer's disease and other neural diseases.^[12]

CSL Plasma, a sub-sector of CSL Behring, is one of the largest plasma collection companies in the world, with over 65 plasma collection centers. ^[13]

CSL Bioplasma (7% of sales in 2009)

CSL Bioplasma is Australia's national plasma fractionator. Sales of albumin have increased in both North America and in China in the last year.^[14]

New albumin processing plants in Bern and Marburg, Australia intend to increase albumin output.^[15]

Immunohaematology is a stand-alone business under CSL Bioplasma that produces Reagent Red Blood Cells (RRBCs) as well as other immunotherapies.

CSL Biotherapies (11% of sales in 2009)

CSL Biotherapies produces vaccines, most importantly, the H1N1 flu vaccine.

Gardasil, created by Merck (MRK), is manufactured and distributed by CSL Biotherapies. Gardasil prevents several forms of HPV.

CSL Biotherapies also produces hundreds of antivenins relevant to poisonous animals and rare viruses found in Australia. Q-Vax is another staple vaccine that prevents Q-Fever found in some Australian meat and poultry factories.^[16]

Trends and Forces

The H1N1 flu's future presence will impact sales

With 21 million doses of vaccine ordered by the Australian government and a $180 million dollar contract with the U.S. government, the H1N1 flu virus greatly increased CSL Limited's total sales in 2009.^[17] Future influenza outbreaks will therefore be of much interest to CSL Limited.

There have been reports that the World Health Organization (WHO) exaggerated the threat posed by the H1N1 virus and the need for vaccines.^[18] However, the Center for Disease Control and Prevention (CDC) reports that the bulk of those who had visited a hospital in the last week of January 2010 with flu-like symptoms had been infected with H1N1.^[19] The flu season remains fluctuating on a year to year basis. Two forms of the flu, the seasonal flu and the H1N1 flu, will ensure that two vaccines will be produced in future years. Regardless of demand, CSL Limited's share of the flu vaccine market is only 1%, leaving much room for expansion on other companies' market share.^[20]

CSL Limited plans to take advantage of continued international interest

The pharmaceutical industry was Australia's top exporter of high-tech products with over $4 billion in generated international sales overall in 2009.^[21] Such regional specialization bodes well for CSL Limited. China's increased demand for albumin has led CSL Limited to take a greater interest in the Asian Pacific market. CSL already completes 9% of total sales in Asia.^[22] Increased albumin prices and plasma therapy also contributed to CSL's expansion in the Asian Pacific.^[23] Finally, two new facilities producing Privigen, which accounted for 34% of CSL's sales in 2009, are expected to meet increased international demand for intravenous immunoglobulin.

Gardasil's shrinking market will affect sales

The initial wave of vaccinations is coming to an end, as Merck (MRK) quarterly reports indicate.^[24] Merck is pursuing approval to sell Gardasil as a HPV vaccine for older women.^[25] This approval for older women will be key if CSL plans to exploit another untouched market. CSL Limited receives royalties for each vaccination sold internationally and is the manufacturer of Gardasil for Australia and New Zealand.

Merck & Co, Inc.'s monopoly on the HPV vaccine market is over, with GlaxoSmithKline’s Cervarix successfully passing clinical trials and gaining approval in October 2009.^[26] However, Gardasil still has an advantage over Cervarix in that it prevents genital warts while Cervarix does not.^[27]

Competition

• Baxter International (BAX) is a large healthcare company that develops plasma-derivative drugs. ADVATE, a blockbuster hemophilia drug, has been a great success and Baxter's BioScience company segment showed remarkable growth in result.^[28]

• GlaxoSmithKline (GSK) is a large pharmaceutical company that specializes in vaccine development and production. Among other vaccines, GlaxoSmithKline has developed rival H1N1 flu vaccines and Cervarix, a HPV vaccine that directly competes with Gardasil, a vaccine sold by CSL Limited.^[29]

• Cangene Corporation is a small pharmaceutical company that produces immunoglobulins. Although Cangene has less than ten products on the market, the company has doubled its profits in the past year and R&D is in the mid 20% range, demonstrating a commitment to growth.^[30]

References

1. ↑ ^{1.0 1.1 1.2} CSL Full Year Results: Australian Stock Exchange, August 18, 2010
2. ↑ CSL Lmtd Annual Report 2008-2009, "CSL Behring", p. 3
3. ↑ CSL Lmtd Annual Report 2008-2009, "Highlights", p. 1
4. ↑ CSL Lmtd Annual Report 2008-2009, "Directors Report", p. 39
5. ↑ CSL Lmtd Annual Report 2008-2009, "Year In Review", p. 3
6. ↑ Reuters: CSL Company Profile
7. ↑ CSL Lmtd Annual Report 2008-2009, "Year In Review", p. 3
8. ↑ CSL Lmtd Annual Report 2008-2009, "Year In Review", p. 3
9. ↑ CSL Lmtd Annual Report 2008-2009, "New Product Development", p. 7
10. ↑ CSL Lmtd Annual Report 2008-2009, "CSL Behring", p. 4
11. ↑ Medline Plus, "Hemophilia"
12. ↑ American Academy of Neurology, "IV immunoglobulin is associated with a reduced risk of Alzheimer disease and related disorders"
13. ↑ CSL Lmtd Annual Report 2008-2009, "CSL Plasma", p. 11
14. ↑ CSL Lmtd Annual Report 2008-2009, "CSL Bioplasma", p. 5
15. ↑ CSL Lmtd Annual Report 2008-2009, "Year In Review", p. 4
16. ↑ CSL Lmtd Annual Report 2008-2009, "CSL Biotherapies", p. 6
17. ↑ Time Magazine Jan. 26, 2010, "Was The Threat of H1N1 Flu Exaggerated?", p. 1
18. ↑ CSL Lmtd Annual Report 2008-2009, "Five Yr Summary", p. 2
19. ↑ CDC Jan. 22, 2010, "2009 H1N1 Flu: Situation Update", p. 1
20. ↑ [CLSA Asian-Pacific Markets --CSL Analyst Report June 17, 2009, p.18]
21. ↑ Bloomberg, "Australian Drug Companies Top High-Tech Exporters, Herald Says"
22. ↑ CSL Lmtd Annual Report 2008-2009, "CSL Bioplasma", p. 5
23. ↑ CSL Lmtd Annual Report 2008-2009, "Review of Operations", p. 39
24. ↑ Merck & Co, Inc., "3rd Quarter 2009", p. 1
25. ↑ Minyanville Jan. 14, 2010, "Gardasil: The Merck Blockbuster That Wasn’t", p. 1
26. ↑ GlaxoSmithKline Oct. 16, 2009, "FDA approves Cervarix, GlaxoSmithKline’s cervical cancer vaccine", p. 1
27. ↑ [CLSA Asian-Pacific Markets --CSL Analyst Report June 17, 2009, p.17]
28. ↑ Baxter International Inc 2008 Annual Report
29. ↑ GlaxoSmithKline 2008 Annual Report
30. ↑ Cangene Corporation 2009 Annual Report
31. ↑ Baxter International Inc 2008 Annual Report, p.36
32. ↑ GlaxoSmithKline 2008 Annual Report, p.12
33. ↑ Cangene Corporation 2009 Annual Report, p.3