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Is CSL Limited a good investment?

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Some companies operate within the everyday lives of investors such as supermarkets, whilst some operate in exotic or specialised fields that make it hard to grasp what it is that the company actually do. A great example is CSL Limited (ASX: CSL).

On its corporate website CSL explains that it’s in the business of ‘development and manufacture of vaccines and plasma protein biotherapies‘. If you browse through the annual report you will find that CSL Behring, which operates the plasma protein biotherapies segment, is the main revenue generator.

If you don’t work in the medical industry (which I don’t) it is likely that the corporate website will not give you a better understanding of its business. Below I want to share with you what I’ve learnt about the plasma protein therapy business.

How does the plasma protein business work?

The raw material for the business is blood plasma, the straw coloured liquid that is a component of blood. Plasma can either be separated from blood extracted from humans post blood donation (known as recovered plasma), or it can be extracted directly during donation (known as sourced plasma). It needs to be noted that sourced plasma is not free – donors are reimbursed for their time.

Blood plasma contains proteins with a wide range of applications in medicine, which are extracted via a process called fractionation in specialised plants to produce the end products for treatment.

How do plasma protein businesses organise their operations?

Since certain proteins (and end products) are in greater demand than others and blood plasma is expensive, the various players in the blood plasma industry have sought different ways to maximise yield.

For example CSL Behring operates a ‘centre of excellence model’. Here each of its plants will specialise in the production of a small range of end products. Certain by-products of each plant may form an input for another end product, so these by-products will be transported between plants. On the other hand CSL Bioplasma, the Australian focused subsidiary within CSL Behring, produces all end products from its sole plant in Australia.

How competitive is the plasma protein industry?

The industry is quite concentrated with a few large players such as CSL. The high costs of complying with regulations and fixed costs involved with plant operation are a major deterrent to new entrants.

Although many countries run a self-sufficiency model (where they collect and fractionate plasma product via domestic plants), or contract out processing of domestic sourced plasma under a toll fractionation model, the reality is that most countries are not able to source enough plasma to meet demand for plasma derived products. Residual demand is met by large multinationals such as CSL, which dampens the competitive forces within the industry.

Hopefully the above information was helpful in giving you some background on CSL’s plasma business, and a start for you to conduct more in-depth research into the company. Researching a prospective investment can be a laborious process, which means you may not come to a conclusion right away. If you’re eager to invest your funds now then I would recommend checking out the top ASX stock handpicked by our Motley Fool analysts.

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As of 2.11.2020

Motley Fool contributor Simon Chan has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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