Biotech CSL Limited (ASX: CSL) is one of the ASX's great success stories with the stock returning 583.2% in the past 10 years before counting dividends. Here are seven reasons why the company could have an equally bright future.
- CSL subsidiary Seqirus is the second-largest influenza vaccine provider in an expanding global market worth US$6 billion. Seqirus was formed in 2015 after CSL acquired Novartis' influenza vaccine business for US$275 million. CSL believes it got a bargain price for the business because regulators would not have allowed Novartis to sell it to GlaxoSmithKline plc which bought Novartis' other vaccine businesses at the time. The division made a loss of US$85.2 million in the first half of 2016 in line with management expectations, but could become a key growth driver once the Novartis business is fully integrated.
- CSL's core business, CSL Behring, provides blood plasma therapies for a wide range of indications. It is a global leader and enjoys a number of sustainable competitive advantages including having the broadest range of quality products in the industry. The division has recently become the leader in China, a vast and nascent market.
- CSL derives nearly three quarters of its sales from North America and Europe and yet these regions make up a small percentage of the global population. The rest of the world represents a large growth opportunity for CSL as these countries become more wealthy.
- CSL will benefit from the aging population thematic that is playing out in many parts of the world. Older people are more vulnerable to influenza and more likely to require blood plasma treatments than younger people.
- CSL is a low-cost leader in the collection of blood plasma from donors through its vast network of highly efficient collection centres. This scale advantage extends to production where CSL utilises the most sophisticated methods available to manufacture consistent and safe products at the lowest possible cost.
- CSL has superb R&D capabilities which have enabled it to create the widest range of blood plasma treatments in the industry. This is attractive to customers who can use CSL as a "one-stop shop" and be confident that all products are manufactured to the same high level of quality.
- CSL enjoys exceptional returns on equity (ROE) thanks to the above factors combining to produce what Charlie Munger, partner of Warren Buffett, would call a "lollapalooza" effect. In 2015 ROE was 45.7% which is quite remarkable for a manufacturer with low debt levels.
Admittedly, CSL does not look cheap based on its current level of earnings, but it is easy to see how the company could continue growing earnings-per-share (EPS) for decades to come.
