Research and development in the field of human biology is very expensive and takes years for acceptance, but can be extremely rewarding if successful.
Blood products and vaccines maker CSL Limited (ASX: CSL), in the latest half year report revealed that it is working on a treatment that will stop recurring heart attacks. This development alone has the potential to transform its business. Chief Executive Paul Perreault says data collected so far on the drug CSL 112 supports its potential use in preventing recurring heart attacks and other coronary events.
He added that CSL had a long way to go in the development of CSL 112, but if clinical trials were successful, the huge market for the drug was obvious. As a global player for blood plasma and several other products, such as influenza inoculations, CSL has the know-how and resources to exploit lucrative drug markets with or without major partners.
The reporting season has just started, with Cochlear Limited (ASX: COH) reporting 53% drop in profit and sales down 5% in the half year compared with the same half last year. CSL has fared better, achieving a 3.4% profit rise in the first half of the 2013/2014 financial year. CSL made a net profit of US $646 million in the six months to December 31, after investing AU $229 million in research and development. The company expects its full year profit to be about 7% above the US $1.22 billion recorded in 2012/13, at current exchange rates.
Mr Perreault reported that the company's underlying operations remained strong, and global demand for its plasma therapies gave it the confidence to expect profit growth. "What has also been pleasing this period is the progress we've made in expanding markets for our existing products and advancing new products for our pipeline," he said.
On 30 April 2013, details were published on the successful rollout in the U.S. of Kcentra, which helps restore the ability of blood to coagulate in patients using Warfarin. It is estimated that 3 to 4 million people in the U.S. use Warfarin. Because of the deficiency in blood clotting factors induced by Warfarin, patients may experience severe bleeding, which can be prevented by Kcentra.
However, CSL 112 has the potential to dwarf Kcentra. Combined, these two drugs should make substantial contributions to earnings for many years. No doubt ongoing development of other products adds further blue sky for CSL. Of course there are risks in drug development and marketing. Risks include competitive developments and law suits, if complications or failures arise. CSL has had plenty of experience over its 90 years of existence and is well prepared to handle unknown and unknowable contingencies. For example, last year a class action law suit in the US threatened the company's profit but was resolved at a cost of AU $64 million, which is relatively small in the overall picture.
Foolish takeaway
CSL is an Australian global success story. It is such a success that only 9% of sales come from Australia. The largest export market is North America with 42%, followed by Europe with 30%. Another factor in favour of local shareholders is the falling Australian dollar, as 91% sales are made overseas.
CSL has a price earnings ratio of 26, which is relatively high. By comparison, Blackmores Limited (ASX: BLK), with only a quarter the sales and less exciting research and development, has a price to earnings ratio of 16. It is the ongoing royalty payments, strong product sales and growth potential that stands CSL apart. In conclusion, CSL offers outstanding value under $70.
