Plasma products such as antibodies and albumin are medical necessities. In many cases there are simply no viable substitutes – at any price. Hospitals and insurers can't walk away which gives CSL (ASX: CSL) significant pricing power.
This, combined with CSL's dominant market position, economies of scale, and the industry's barriers to entry, have made it a favourite of investors.
The company increased operating profits 12% over the past 12 months – with an industry-leading margin of 31%. But sustaining those levels over the next few years won't be easy.
CSL has benefited in recent years from capacity constraints at competitors, with the company's antibody sales growing 22% over the past two years, compared to 14% for the industry as a whole.
CSL's largest competitor, Baxter, had to temporarily close its Los Angeles fractionating facility in 2013 while it was being upgraded, which led to a supply bottleneck.
However, the Baxter plant is now back online and supply is returning to normal. What's more, the industry's third largest producer, Grifols, recently received approval for a new fractionation plant in California, which is expected to be up and running later this year, and CSL itself is increasing capacity at its Kankakee, USA facility (which we recently toured).
If aggregate capacity gets ahead of demand, we could see a return to the days of volatile pricing and supply gluts that characterised the plasma industry prior to the last decade's round of mergers.
There may already be signs that price competition is on the rise. CSL's latest interim result showed immunoglobulin revenue increased 5% in the six months to December, but required an 11% increase in volume – which implies a 5% fall in the average selling price.
So what can shareholders expect?
CSL, Baxter and Grifols account for 90% of the plasma industry. Historically, the oligopoly has been characterised by disciplined pricing and low competitive rivalry, so we expect aggressive pricing to be a short-term phenomenon as Grifols and Baxter try to regain lost market share.
CSL's pristine balance sheet and industry-leading margins mean it's working from a position of strength, but with prices flat and capacity bottlenecks at Baxter and Grifols easing, CSL's above average growth rate of recent years will be difficult to sustain and is likely to return to the industry average of 5-8% a year.