CSL delivers an extraordinary transformation

We met with senior company management of several of our portfolio holdings during the June quarter in both Australia and the UK. A notable highlight was a meeting with CSL, where we explored the opportunities for its influenza vaccine business, Seqirus.

Delivering an Earnings Turnaround

CSL’s influenza vaccine company (Seqirus) is the world’s second-largest influenza business. Seqirus is a major pandemic partner to governments around the world with a broad portfolio of influenza vaccine products.

CSL’s influenza business has undergone an extraordinary transformation following its US$275 million purchase for Novartis’ flu vaccine business in 2014. CSL combined it with its own vaccine and serum business bioCSL to create Seqirus.

At the time of purchase, Novartis was the global leader in cell-based influenza vaccines, yet it was heavily unprofitable. Despite considerable investor scepticism, CSL’s long heritage of capital acumen and discipline underpinned an impressive turnaround in its profitability. 

Indeed, Seqirus has moved from an EBITDA loss of c.USD$245m in FY16 to an expected EBITDA profit of US$200m in FY20.

The Rise of Cell-based influenza vaccines

For more than 80 years the most common way that influenza vaccines are made is using an egg-based manufacturing process. More recently, advances in influenza vaccines have led to the introduction of cell-based and recombinant flu vaccines, which do not require the use of hen eggs in the production process.

The innovation of influenza vaccine technologies has led to improved vaccine availability and effectiveness. Seqirus has become the global leader in cell-based influenza vaccines. 

Today, Seqirus remains enviably positioned to extend its leadership in cell-based influenza vaccines with over 30% of its vaccines manufactured using cell-based technology. 

Seqirus’ FLUCELVAX Quadrivalent is the first cell-based seasonal influenza vaccine licensed in the U.S. Seqirus remains well ahead of its competitors in cell-based vaccines, with its nearest competitor producing less than 5% of vaccines using this technology. Undoubtedly, the development of more innovative based vaccines has underpinned an attractive pathway of improved returns for Seqirus.

Influenza Poses A Constant Pandemic Threat

Governments and health authorities are aware that influenza poses a constant pandemic threat. There have been 4 influenza pandemics in the last century, with a mortality rate of +50m. World health authorities are acutely aware that the next pandemic is a question of ‘when’ not ‘if’.

Influenza has a higher incidence and higher mortality rate than any other infectious disease. Indeed, the current Australian flu season has been exceptionally severe and northern hemisphere countries are anticipating a difficult flu season in 2019/2020. The challenge with influenza preparedness is that it changes from season to season. For each season there is only a small window of time to identify and manufacture a vaccine for the upcoming flu season. 

Critically, governments globally need to ensure they are prepared and able to respond to a potential pandemic. Seqirus has reservation agreements with the governments of Australia, UK and the US to ensure that these jurisdictions have capacity to respond to the demand for vaccines in each flu season. If a pandemic did occur and borders were “closed”, it is vital for countries to have ready access to influenza vaccines. Seqirus is strategically positioned with manufacturing and Research & Development facilities across the continents of Australia, UK and the US.

Investment Conclusion

The formation of Seqirus by CSL is a rare corporate success story of an acquisition that was integrated effectively and transformed into a highly profitable business. Seqirus has optimised production facilities and has been at the global forefront in developing cell-based vaccines. 

Hence, from an investment perspective the future latency of the Seqirus business remains highly attractive as it is well placed to grow both volume and price into the future.