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The bullish case for CSL Limited (ASX: CSL)

The share price of Australia’s largest biopharmaceutical company is relatively flat in 2019 and down nearly 15% from its soaring high of $230.28 last year. However, a strong half year report and potential for organic growth paints a bullish case for the CSL share price as a long term buy.

High multiples

CSL’s core business involves ‘fractionation’ of human plasma, which is then used to treat a wide range of diseases and medical conditions. In addition, CSL boasts an impressive research and development (R&D) department that provides additional therapies covering a wide range of conditions ranging from heart disease and influenza to anti-venoms.

Currently, CSL has the third largest market value of any company listed on the ASX and trades at 32 times forward earnings. Investors are willing to pay these multiples because of the consistent and organic earnings growth CSL has provided over the long term. With strong management, commitment to patient care, industry leading margins and great investment in R&D, CSL can be regarded as one of the most quality publicly traded companies in Australia.

Strong half year

Earlier this year CSL met market expectations and reported $US1.2 billion in first-half profits whilst also lifting full-year guidance. CSL’s half year report highlighted revenue of $US4.5 billion, a lift of 11% from the year prior. CSL attributed the beat in revenue to high demand of its core immunoglobin products for chronic therapy and increase in sales of high value flu vaccines.

Sales of core plasma-based products were up 8% from the previous year to $US3.55 billion and immunoglobin sales were up 12% to $US 1.7 billion. CSL’s haemophilia and albumin division represents a small portion of CSL’s portfolio and reported a fall in sales. Four different strains of flu saw increased demand for seasonal influenza vaccines in North America last December. As a result, CSL’s Seqirus flu-vaccines posted maiden profit $52 million after generating sales of $US957 million.

Cornering the market

Global supply of raw plasma is short, stemming from producers being unable to keep up with ever-growing demand. In addition to CSL, Spanish company Grifols (NAS:GRFS) and Japanese owned Takeda Pharmaceutical Company (NYSE:TAK) are the main suppliers of plasma around the world.

CSL differs from its two major competitors in cornering the highly lucrative market by adopting a different growth strategy. The Grifols and Takeda strategy to control supply is to acquire independent collection centres. However, the increased cost of collecting and selling plasma from independent centres reduces their margins of profitability and plasma volumes are hard to grow organically as some independent centres struggle to turn a profit.

CSL on the other hand, organically expands its own centres and extracts more plasma per centre in comparison to its competitors. As a result, CLS can corner the plasma market as the lowest cost producer by generating greater supply at a lower cost.

Foolish takeaway

In my opinion, CSL is a quality franchise and has all the hallmarks of a sound investment.  As a low-cost producer CSL has a sustainable competitive advantage, providing strong organic growth. An extensive R&D department providing a pipeline of products also allows CSL to take advantage of the growing market

In addition to CSL, I also think Cochlear Limited (ASX:COH) and ResMed Inc (ASX:RMD) are quality healthcare stocks listed on the ASX that are worth taking a look at.

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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. 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 Scott Phillips.

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