Healthy and wealthy, but is CSL's buyback wise?

CSL has rosy opportunities for global growth, but it will need to make the most of these to ensure its prosperity in the longer term.

CSL believes that the growth it has achieved over the past decade can continue for the next five to 10 years. That’s why it has decided to embark on another $900 million share buyback.

 Clearly such a strategy  has higher risks now the shares are around  $65; a couple of years ago they were half that figure. If CSL's growth takes a turn for the worse, the buyback will be akin to burning money. It would have been far better to return the money to shareholders via dividends.

As seen in the KGB interview with new chief executive Paul Perreault, CSL has advantages that are enjoyed by no other Australian company and by few others globally.  While most global pharmaceutical companies have their  strength in research and marketing, CSL’s  strength is in its massive plasma collection operation in the United States.  And while most of the major phamaceutical companies spend around 16 to 20 per cent of sales in research, CSL spends half that rate. CSL’s  success rate is much higher than its competitors because its research is in specialised areas and its base raw material is plasma.

There is a twinkle in CSL's eye. Most heart attack victims die at the second or third attack, rather than the first  heart attack.  CSL believes that its  so-called RHDL product will reduce the instances of  second  heart attacks by reducing cholesterol. CSL shareholders should watch out for that product because it's a blockbuster that could  transform the company yet again.

In theory, China could provide a great opportunity for CSL. But China only allows one product based on US plasma (Albumin) to be imported.  To really expand in China, there needs to be major changes in collection practices.

While the US has the best blood plasma collection system in the world,  it is not as advanced with its use of the product. A product called Kcentra, which has been used in Europe for a decade, has just been approved for use in the United States. CSL believes this could be a major growth area. 

 Meanwhile, the company has made Australia the centre of Privigen production. In other countries, CSL must compete for the best ideas from universities with other pharmaceutical companies. But in Australia, CSL is the first calling point.  It’s a huge advantage.  But with CSL's price earnings ratio sitting above 24, management will need to convert these opportunities to justify the buybacks.