'Beautiful blood': How CSL became a global success story

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'Beautiful blood': How CSL became a global success story

By Nassim Khadem

Peter Schiff spent much of his life donating blood to the Australian Red Cross. He started giving blood in 1953 as a medical student in Sydney and continued until recently.

So it’s fitting that the 83-year-old’s investments in the blood business – he was one of CSL’s early investors when the company listed on the Australian Securities Exchange in 1994 – have made him a small fortune.

CSL shareholder Peter Schiff

CSL shareholder Peter SchiffCredit: Eddie Jim

CSL listed with a market value of $299 million, at $2.30 a share (equivalent to 81¢ today). Today, CSL shares are trading at $185 and analysts are betting the price will soon reach $200 or  more.

The once-small cap biotech now sits alongside the big banks and miners as its market capitalisation edges above $83 billion.

CSL competes on the world stage to deliver life-saving drugs and is managing this high-risk game alongside the world's best in the business – names like Sanofi, Shire, Grifols and Octapharma.

“I don't have them [shares] all anymore, I sold some,” says Schiff, who also worked as a former medical director of the plasma division at CSL. He joined the company in 1965 and retired in 1999.

“But I still have some.”

Illustration: Joe Benke

Illustration: Joe Benke

Schiff says Brian McNamee, who was chief executive for 23 years, should be given credit for most of the company’s growth since listing.  McNamee left in 2013 but in October returns to the business to take over from retiring chairman John Shine.

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“He [McNamee] was the person who took us offshore,” Schiff says. “CSL has been an Australian company since 1916 and when he came on it took on leading companies in Switzerland and Germany.”

Plasma play

CSL's major strength is the plasma products. "They are made from human blood,” Schiff says. “And the market, because of population growth, continues to expand.

"CSL also has a very active R&D group who are all the time working and expanding the range. All those things have contributed to the company’s success, and I think the future of the company will be rosy.”

Brian McNamee returns to CSL as chairman in October.

Brian McNamee returns to CSL as chairman in October.Credit: James Davies

George Riley, another retail shareholder who also bought in at the float, says investing in CSL at the time was one of the best financial decisions he ever made. The worst was listening to a broker who two years later told him to get rid of half of his shares.

“I got a call from a broker to sell at $5.40,” he says. “I hate to say it but that decision has cost me over $800,000 at today’s price.”

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Still, Riley’s happy because he purchased 1000 shares when the price was $111, and he says CSL remains the largest component of his investment portfolio.

Riley, who toured CSL’s Broadmeadows facility last year with the Australian Shareholders Association, says the company’s plasma collection centres, and latest products aimed at preventing repeat heart attacks in patients put “CSL ahead of the curve”.

McNamee, who is mostly keeping a low profile until he officially takes over as chairman in October, in an email said that while CSL is a very different organisation now compared with when it floated, “there are consistent cultural characteristics that remain firmly embedded at its core”.

“Back then, as it does now, the company had great technical depth – a deep understanding of what patients with rare and serious diseases need, the science to successfully innovate and the operational expertise to manufacture and commercialise high quality therapies,” he says.

“Most of all, the organisation had a genuine belief that it could identify underperforming international assets and help them thrive – because we understood our core expertise and had the determination to use it. That hasn’t changed at all.”

No overnight success

Last year CSL made $US6.92 billion in revenue (up 15 per cent on the year before). Its net profit after tax was $US1.4 billion.

In May company delivered its second profit upgrade since the start of the year, saying it now expects net profit after tax for fiscal 2018 in the range of about $US1.68 billion to $US1.71 billion.

“We didn't just get to $84 billion overnight, right. It’s taken a few years,” CSL CEO Paul Perreault tells Fairfax Media. He is doing a phone interview from CSL Behring’s US headquarters in King of Prussia, Pennsylvania.

Perreault’s family still lives in the United States and he spends much of his time travelling between his home country and Australia, as well as to other CSL facilities in Germany, Switzerland, the United Kingdom and China.

CSL CEO Paul Perreault

CSL CEO Paul PerreaultCredit: Jesse Marlow

“If we go back to the beginning, the first thing was that Brian [McNamee] realised if the company is to continue to grow we have to move outside of Australia,” he says.

McNamee took the company global soon after listing. In 1998, CSL acquired US-based animal health business Biocor from Bayer for $15 million, beginning its international position for CSL’s veterinary products. In December 2003, CSL sold its animal health vaccines business to Pfizer for $US126 million.

Perreault is excited about CSL's next big product, CSL-112, which has just entered the third phase of clinical trials in the hope of commercialisation.

It aims to prevent second-time-around heart attacks and stroke after a patient suffers an initial heart attack. Perreault describes CSL-112 as the company's “biggest transformative product at the moment”.

He's also optimistic about CSL's move into new areas of organ transplants and gene therapy. But it is big data and artificial intelligence that is key to its future products and markets, he says.

“We are looking right now to 2030, in our thinking, about what is the future going to bring for CSL, and for patients and medicine and health in general," Perreault says.

"When you think of things like big data, and AI, and around blockchain and what’s coming, in 2030 will CSL be the same or should we be looking differently in how we invest?”

Perreault joined CSL in 2004 when CSL Limited acquired Aventis Behring. He says that global aquisition spearheaded by McNamee “put CSL on the map as a global player in the plasma therapy industry”.

The next phase, Perreault says, will be harder to manage.

While collecting blood and making it into a useful life-saving product remains at the core of everything CSL still does, it has branched out into tougher, and more high-risk areas, which some analysts have, over the years, warned may mean its hefty share price tag isn’t justified.

Blood is ‘beautiful’

Despite 1980s scandals involving contamination of blood products with the HIV virus, which affected all the industry, CSL and its industry peers worked together to eliminate contaminants from plasma products.

CSL is now one of the world’s largest manufacturers of blood plasma products. It held less than 1 per cent of global plasma market share at the time of listing, compared with more than 20 per cent of global market share today.

“We have this beautiful plasma business that is growing ... that allows us to invest in R&D in other areas,” Perreault says.

Vials of early penicillin issued by CSL.

Vials of early penicillin issued by CSL.

“We are not just burying our head in the sand and saying that this will go on forever – we do have other biotech assets that we’re looking at.”

In Australia, CSL relies on blood donated through the Red Cross, but the majority of its source material comes from donors across the United States, who get paid $50 to $60 each time they donate blood.

CSL's business is split into two main segments: CSL Behring, which manufactures plasma therapies, and Seqirus, its vaccine business. In total, the business employs more than 20,000 people in 30 countries.

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The plasma collection centres sit under CSL Behring. The company now operates one of the world’s largest blood plasma collection networks, with more than 170 centres across the globe, and more in the pipeline.

It's not standing still either, opening about 25 a year, at a cost of about $3 million each. It has been a direct contributor to CSL’s recent growth, with competitors’ product sales constrained by a lack of supply.

CSL is also in the vaccine business. Its experience with influenza dates back almost 100 years when it produced vaccine during the Spanish Flu pandemic in 1919.

Seqirus was created in July 2015 following the merger of the acquired Novartis influenza vaccines business and the existing bioCSL business and is the world’s second largest influenza vaccine provider in terms of sales, with operations in more than 20 countries in the $US4 billion global industry.

Seqirus has manufacturing operations in North America, Europe and Australia that employs more than 2000 staff. Its quadrivalent flu vaccines cover four strains of flu and have been in higher demand around the world.

In Australia there’s been a surge in demand for flu vaccines, so CSL is making more vaccines for this flu season.

In Australia there’s been a surge in demand for flu vaccines, so CSL is making more vaccines for this flu season.Credit: Graham Barclay

Perreault says its massive manufacturing facility in Holly Springs, North Carolina, is the only commercial-scale cell-cultured vaccine producer in the world. CSL says influenza viruses isolated and grown exclusively in cells can be more similar to influenza viruses in circulation.

The facility also allows CSL to boost production of the vaccines when needed.

In Australia, there’s been a surge in demand, he says, so the company will be making more vaccines for this flu season.

There seems to be potential for better matches on flu strains, he says, but then qualifies that by saying it is a seasonal business and that comes with ups and downs.

“There’s a new product every six months - one for the southern hemisphere and one for the northern,” he says. “It’s an interesting business for sure. It keeps you on your toes.”

CSL Behring: the engine

But it's not flu vaccines but blood that contributes to the bulk of CSL’s sales. CSL Behring is the company’s growth engine.

By collecting blood and separating it into components for a range of therapeutic uses, this division contributed $US5.8 billion in sales in 2017.

As well as keeping manufacturing local through its Broadmeadows plant in Melbourne, the company manufactures from Bern in Switzerland, Marburg in Germany, Kankakee in Illinois and Wuhan in China.

By collecting blood and separating it into components for a range of therapeutic uses, CSL Behring contributed $US5.8 billion in sales in 2017.

By collecting blood and separating it into components for a range of therapeutic uses, CSL Behring contributed $US5.8 billion in sales in 2017.Credit: James Davies

Its immunoglobulins products, Hizentra and Privigen, have performed especially well. These are used to treat and prevent infection of auto-immune diseases, neurological conditions and to prevent haemolytic disease in the newborn. It represents the company’s largest blood therapy area and contributed sales of $US2.8 billion in 2017 (up 14 per cent over the year).

CSL also has products for people with a genetic condition that causes abnormal bleeding called haemophilia. It is caused when blood does not clot properly, and so specialised treatment is needed.

In revenue terms, the global haemophilia market is worth about $US10.5 billion and is expected to reach $US15.1 billion by 2025.

Last year CSL’s haemophilia product franchise increased 4 per cent in constant currency, versus the prior year to $US1 billion, mainly thanks to the uptake of CSL’s haemophilia B drug, Idelvion.

It received US Food and Drug Administration approval in 2016 and has since launched in 13 countries. The new treatment protects patients from bleeding episodes for up to 14 days, which means people living with haemophilia B can inject themselves with the therapy weekly or fortnightly rather than two to three times a week.

Then there’s CSL Behring’s portfolio of albumin products that yielded sales of $US840 million last year, an increase of 7 per cent over the year, primarily driven by strong ongoing global demand.

CSL Behring has a new albumin production facility in Broadmeadows, which is anticipated to receive regulatory approval next year.

CSL is also a supplier of albumin in China, where it has been selling for 20 years. It's one of the only products that China's government allows to be imported.

In order to expand the product offering in China, CSL last year announced agreed to buy 80 per cent equity in Chinese plasma therapies manufacturer Ruide for $US352 million.

Ruide has a broad portfolio of domestic plasma products, with a manufacturing facility and four plasma collection centres all in central China.

“I saw it as a strategic opportunity, not as a jump-to revenue, buy-an acquisition [move],” Perreault says.

It may be six to 10 years before it comes to scale, he says. Currently the China albumin business brings in about $US600 million in annual revenue.

The acquired business brings in about $30 million, and his hope is that over time CSL gets a bigger share of the market. “Look, it’s hard to ignore 1.3 billion people,” he says. “I think we can do quite well in China."

CSL-112: the potential gem

But for the time being it’s not the China market that has Perrault most excited. It is CSL-112. In March, CSL Behring announced its first patient enrolment phase of its Phase 3 clinical trial of CSL-112.

The phase III trial, which is expected to take four years and a big chunk out of the company’s R&D war-chest at a cost of $US450 million-$550 million, will enrol more than 17,000 patients from about 1000 medical centres around the world.

If the trials prove successful, the scale of future growth is huge.

Cardiovascular disease is the leading cause of death globally.  In Australia, an estimated 54,000 people are hospitalised every year as a result of a heart attack.

In Australia, an estimated 54,000 people a year are hospitalised as a result of a heart attack.

In Australia, an estimated 54,000 people a year are hospitalised as a result of a heart attack.Credit: Nic Walker

Numbers of people suffering heart attacks in the United States are about 750,000 every year.

Nearly one in five survivors of heart attack will experience a recurrent event within one year of the initial event. The majority of these recurrent events happen within the first 90 days and are associated with a high rate of morbidity and mortality.

CSL is hoping that its CSL-112 therapy can help prevent repeat heart attacks by removing cholesterol from plaque following a heart attack and stabilising dangerous plaque lesions in the arteries that could otherwise erupt and cause another cardiovascular event.

“Nothing has been able to prevent second heart attacks or stroke within the first 90 days post-heart attack - so from a patient perspective that would be a remarkable advancement,” Perreault says.

“If we can prevent those [secondary attacks] that will serve millions of people potentially around the globe. ”

Macquarie analysts say this product, alongside CSL’s R&D pipeline, investments in China, and a recent aquisition aimed at paving the company’s way into gene therapy have “potential long-term upside”.

It says compared to other big Chinese operators, like China Biologic, CSL Behring generates higher revenue per litre of blood collected.

But Morgan Stanley's Sean Laaman in a research note says the risk is that about $US500 million of R&D spent on CSL-112 could be too much "to test a therapy based on an unvalidated hypothesis for a shrinking market".

Gene therapy, organ transplants

CSL is already an Aussie innovation success story that Malcolm Turnbull loves to boast about.

“What you are doing here and what all your scientists are doing here is what we need to do more of,” the Prime Minister said in March 2016 as he stood beside CSL’s chairman, John Shine, and University of Melbourne vice-chancellor professor Glyn Davis, unveiling the expansion of Parkville’s Bio21.

Glyn Davis (left) and Malcolm Turnbull (centre) jousted over industry collaboration last year. Pictured with CSL chairman John Shine at the announcement of a 5000-square-metre expansion of the university's  Bio21 Molecular Science and Biotechnology Institute

Glyn Davis (left) and Malcolm Turnbull (centre) jousted over industry collaboration last year. Pictured with CSL chairman John Shine at the announcement of a 5000-square-metre expansion of the university's Bio21 Molecular Science and Biotechnology InstituteCredit: Jesse Marlow

The Bio21 Molecular Science and Biotechnology Institute in Parkville, which the university and CSL are joint partners in, is precisely what Turnbull wants to see more of under his National Innovation and Science Agenda: collaboration between institutions and industry so that Australia can be seen as a world leader in life sciences and biotechnology research.

CSL also has a research and development arm that employs 1500 people around the world to focus on developing its next generation of life-saving products.

The company spends between 10 to 11 per cent of its annual revenue on R&D ($US645 million in 2017) and its new products typically derive from the business it is already familiar in: therapeutic uses for plasma proteins.

Perreault and CSL’s R&D director and chief scientist, professor Andrew Cuthbertson, are excited about the future of organ transplants and gene therapy.

Even in the rare cases that a transplant succeeds, organ transplants often fail because the body later rejects the organ.

CSL is trialling the use of blood proteins to improve the quality and sustainability of organs, such as kidneys, for transplant.

“Human transplantation is an area of medical need, particularly because organs like kidneys or hearts or lungs are in very short supply,” Professor Cuthbertson says.

CSL already has a clinical trial underway in this space, and another will begin next year.

The hope is that CSL’s C1 Inhibitor concentrate will prevent a kidney organ being rejected by a patient after a transplant.

Organ transplants often fail because the body later rejects the organ.

Organ transplants often fail because the body later rejects the organ.Credit: AP

The gene therapy space also gives the company high hopes.

In August, CSL Behring acquired Calimmune, a US biotechnology company focused on the development of gene therapy with R&D facilities in Pasadena, California, and Sydney, for an upfront payment of $91 million. Further milestone payments could hit $US325 million over eight years.

It will help CSL focus on the development of stem cell gene therapy, which it hopes can treat patients suffering from currently incurable genetic diseases.

The company is holding clinical trials around the world in a bid to treat a rare blood-related “sickle cell disease”.

The genes for sickle cell disease are common in people of African, Middle Eastern, Southern European, Indian, Pakistani and Caribbean origin.

“We are going back and fixing the gene so the patient can make the correct version of the protein rather than having to fight it,” Professor Cuthbertson says.

“We want to first target sickle cell disease. If we can make it [the treatment] work in sickle cell disease, it’s likely we can use it for other diseases caused by a problem in an individual’s genes.”

CSL looks to AI and big data

As the global healthcare and pharma industry looks at the potential of AI and big data, it's only natural that CSL has too.

Professor Cutherbertson says partnerships like Bio21 and with the Walter and Eliza Hall Institute give the company access to medical scientists and academics studying big data and AI.

“Things like AI will have a big impact on patients,” he says. “AI algorithms are being used to allow machines to study X-rays and MRIs and computers are being trained to get better and better at recognising digital patents.”

He says treatment algorithms based on AI can more accurately diagnose what is potentially wrong with the patient.

Professor Cuthbertson says it may be another 10 years before the projects CSL is thinking about in this space bear fruit. “It’s why our relationships with world-class medical research scientists in Australia and other parts of the world are so important,” he says.

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