CSL’s $88 Billion Empire of Blood and Iron Sees Shares Falter

(Bloomberg) -- Human plasma is a protein-rich compound made by spinning blood so fast that the heavier red blood cells are flung aside like clothes on the side of a washing machine, leaving behind a straw-colored liquid. It is also the basis of CSL Ltd.’s $88 billion health-care empire. 

Australia’s largest biotechnology company delivered a 750% return for investors in the decade before the onset of the Covid-19 pandemic by dominating the global market for the critical substance. However, since the start of 2020, the stock has plateaued for the longest period since its listing. The firm first had difficulty getting people to both sell and gather blood from which to make plasma during lockdowns and then struggled with its largest-ever acquisition. 

Chief Executive Paul McKenzie, who is a year and a half in the job, needs to find a way to boost profits from CSL’s 2022 purchase of Switzerland-based Vifor to revive the shares. The $11.7 billion acquisition was designed to diversify the company’s portfolio by adding treatments for iron deficiency and kidney disease. However, generic competition in the European Union has eroded margins for Vifor’s best-selling medication and slashed returns on invested capital, convincing some investors that CSL overpaid for the business. 

Still, the acquisition has catapulted CSL into the position of the world’s largest provider of iron therapies. One in four people globally don’t have enough of the mineral, which is essential to transport oxygen in the blood and make muscles work. Demand for iron supplements will help boost the unit’s sales over the next five years, according to McKenzie. In particular, he expects iron infusions to provide plenty of opportunities for growth by treating various ailments.  

“There are so many things that iron could benefit,” said McKenzie in an interview in Melbourne. “Heart failure we believe is a big one. Anemia is a big one. Women’s health is a big one.”

He has yet to convince the market. Since the deal closed in August 2022, the company’s shares have dropped 5.5% compared with a 20% gain for the broader ASX200 index, weighed down by disappointment in the Vifor acquisition.  

CSL “absolutely paid too much,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners. “In time, they will generate a return. It’s just they should have done their due diligence a bit better. For such a large acquisition, investors put a lot of faith in the management.” She said the purchase made strategic sense. 

The company’s move into iron supplements was spurred in part by a growing need for the treatments.  The World Health Organization estimates that in 2021, anemia affected roughly 2 billion people, with the vast majority of cases attributed to iron deficiency. Children and women of reproductive age suffer at the highest rates. That same year, the WHO began urging hospitals to screen for anemia and optimize iron levels in patients ahead of planned surgeries, aiming to reduce the reliance on higher-risk blood transfusions.

A study published this month highlighted the growing importance of this approach, finding that a single intravenous iron treatment reduces hospitalization risk by 17% for anemic heart failure patients. 

Plasma is still the company’s biggest business, accounting for about 72% of sales and 66% of profit. It is ubiquitous in hospitals’ operating rooms globally and is used for bleeding disorders and burns. Plasma is also the basis for immunoglobulin, which is used to treat autoimmune diseases, such as Stiff Person Syndrome, which affects Canadian-born singer Celine Dion. With almost 350 plasma collection centers in the US, Europe and China, CSL is one of the world’s largest and most efficient producers of the material. The company is also the world’s second-largest maker of flu vaccines.

Its success in plasma stems from a series of acquisitions orchestrated by former CEO and current chairman Brian McNamee. Over the course of a 23-year career, he snapped up rivals including businesses founded by Switzerland’s Red Cross and German Nobel laureate Emil von Behring, the father of serum therapy. 

CSL traces its roots to 1916, when the Australian government set up Commonwealth Serum Laboratories in response to World War I cutting off the country’s access to life-saving medicines from overseas. It was listed in 1994 as part of a wave of initial public offerings of state-owned companies that included Qantas Airways Ltd., Telstra Group Ltd. and the Commonwealth Bank of Australia. 

“There was a lot of skepticism for an ex-government group, that it would be very fat and very lazy,” said Michael Glenane, who was an analyst for McIntosh Securities, the lead manager on the CSL listing. “At that stage there was very limited understanding of what the actual company did.” 

Some forward-looking investors could see CSL was “a cash machine because of high depreciation charges and pretty lucrative government contracts,” said Glenane. 

That turned it into a favorite for both retail and institutional investors. Australia’s A$4 trillion ($2.6 trillion) pension industry poured into the stock with some of the largest funds among the top 10 owners. So did small individual investors, drawn to CSL’s capital appreciation. 

“It has an incredibly loyal retail shareholder base,” said Michael Muntisov, who has monitored the company for five years for the Australian Shareholders Association, which represents thousands of individual investors. “And you see that at the AGM, when it can sometimes resemble a love fest.”

The love was lacking this year. At the company’s AGM in October, frustrated with the company’s performance more than 26% of shareholders opposed the pay package for top management. Under Australia’s corporate governance rules, this is termed a “first strike”. This is important because if a quarter or more of shareholders vote against executives’ pay the following year, it will trigger a subsequent vote on whether the board should be dissolved. 

“We will go back and look in detail and say, ‘look, are there further things that we can modify that would satisfy people?’” said Chairman McNamee. “But do I ever think we're going to get a hundred percent support for remuneration? No.”

Vifor’s top seller is Ferinject, a treatment for anemia that is infused rather than swallowed. Putting iron compounds straight into the bloodstream makes it easier for the body to absorb them. In the EU, Ferinject faces increased competition from generics and has had to cut prices in response. In the US, the company has been hit by what’s known as step edits, a way in which insurers prioritize less expensive medicines. This has held sales below the company’s initial expectations. While the business has not been as profitable as anticipated, CSL defends the acquisition, arguing that the long-term outlook for iron treatments makes it an attractive market to be involved in. 

“There’s no doubt that we underestimated some of the competitive challenges,’’ said McNamee, citing the competition from generics and US step edits as examples. “But that doesn’t mean the categories in which (Vifor) operates aren’t ones in which we want to compete in.”

The company’s specialized treatments for people with kidney disease took a hit from Covid, which has been particularly deadly for people on dialysis. Some studies have suggested that GLP-1 weight-loss drugs, such as Wegovy, could also curb kidney disease. McKenzie said CSL is monitoring the development of those medicines but does not currently see them as a threat. 

The US is the company’s largest market and CSL does not expect the incoming Trump administration to have a significant impact on its business in the country.  Even if vaccine skeptic Robert F. Kennedy Jr. is confirmed as Secretary of Health, the company anticipates continued demand for its products. “At the end of the day, Americans care about people being well and healthy and I really don’t have any significant concern for our life-saving drugs and our life-saving vaccines being impacted,” McNamee said. 

While CSL’s expansion into iron treatments has not gone to plan, it is still expanding the business. The company recently started selling Ferinject in Canada and has started operations in China. CEO McKenzie calls the market for iron treatments “underserved” and says demand for the element’s medicinal uses will eventually offset Vifor’s lower-than-expected earnings. Some of the company’s long-term investors back his assessment. 

“CSL has an outstanding track record over the long term,” said David Grace of the Australian Foundation Investment Company, which owns about A$629 million of the company’s shares and has been invested since at least 2005. “We haven’t seen that in Vifor yet, but we’re confident we will.” 

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