Following his final results announcement with CSL, chief executive Brian McNamee tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:
Alan Kohler: Well Brian, just looking at your achievements over a long period of time at CSL, it just seems to me that one of the most interesting things is that Behring actually began fractionating plasma well before CSL did. ZLB was set up and was well before CSL started working in plasma and yet CSL bought them. So, the question I suppose is why wasn’t it the other way around? How come you were able to go from a standing start to the position where you bought Behring and you bought ZLB and through that became the largest manufacturer and seller of plasma products?
Brian McNamee: Well, there’s no doubt we always as a company had great respect for what ZLB did in hemoglobin and Aventis Behring. Behring were the pioneers of the whole coagulation field in plasma derivatives. So we always greatly respected them, so it is interesting that sometimes even the pioneers can fall on complex times if their owners get distracted and don’t invest in the business. So we got our timing right when we approached both companies and they were involved in a disposal process that we were able to share with them our enthusiasm for their business.
AK: Was it just management? Was it because CSL was better managed than Aventis Behring and ZLB?
BM: It was certainly that we could convey the view that we want to give the business a future. We had a clear plan as to how we could add value to their business. We respected them greatly for their skills and their capabilities, so we weren’t cultural imperialists. We greatly respect our Swiss and German colleagues and so there was no notion that they were being taken over and that they were going to work to our method. We actually more respected what they could do for us and to some degree we were able to lift them out of where they were and give them a global vision for the business and a vision for success in that.
AK: Because it is incredible that this little Australian business that used to be government owned was able to do that – to give these German and Swiss leaders in the field, that started well before you, that global vision that you talk about. It’s an incredible thing.
BM: Well, I mean it just shows you that… It is true also that CSL was a respected peer in the field. The fact that although we came from a small market and we were government owned didn’t really diminish the reality that we had technical experts inside the company, we spoke the same language, they understood what we had done as an organisation as well, so it is true that we collected the relatives to some degree. We were all relatives. We were all fundamentally geographically constrained regional businesses.
It’s just that we were the runt of the litter to a degree and yet to some degree whether it be the Swiss… Actually their main business was actually in the US at the time and Aventis Behring which was mainly a very significant European business. We were able to give them a view of, if we brought the family together to some degree, we could create a great organisation that we’d all be proud to work for and I think that’s what we did.
Stephen Bartholomeusz: Brian, as Alan said, you were a small company and you were an Australian company with very little experience offshore before ZLB. At what point after you joined CSL did you think here is a chance to build an international, indeed global, business here.
BM: Well, you always have a dream and I’d worked in the pharmaceutical industry. I’d lived in Germany. So, I understood there are only two ways in which you can succeed in our industry. You both had to innovate. You have to have something that people want to buy. And you had to operate in Europe and North America. You could not survive in a local/regional market. So, the rules were very clear. The question is ‘were we going to be a victim of that process?’ You know, most, many companies end up putting up the flag and sell themselves off. Or were we going to be willing participants to try and be, you know, a collector and aggregator of these assets?
Well, I guess we were young enough and enthusiastic enough that we wanted to have a go. I mean the whole idea of the privatisation was to give the company a future and have a go. The easy thing is to put yourself up for sale, so we didn’t want to do that and we just were of a mindset that that’s what we wanted to do.
SB: So, are you saying that on day one you had that vision?
BM: Day one, day one, we said we wanted to build a great Australian company that was going to be global. Now, we didn’t really know what the pathway was. I certainly accept that as well.
AK: But the first thing you did was, I think, the contract with the American Red Cross in 1999.
BM: Actually the funny thing… the first thing I did and how I managed to persuade government that they wouldn’t hold any shares. If you go back to the privatisation, first of all I had to persuade them not to do a trade sale which is what Finance and Treasury wanted to do, but the second thing was I wanted them not to own any shares. I said look don’t hang around, you’re actually… you know, you’re not going to be happy with what we’re going to do because we’re going to globalise. And so I said to them the first acquisition I’m making is in the US. We’re looking at a cell culture which is a different business, but we used to be in it. I said we want to buy a business over there; it’s $20 million. Now, do you want to be involved in the risk and liability of a US business? Well, that was absolutely a home run for me in the sense that they ran from ever owning a share in the company. We had to do it. We had to globalise. We had no choice and you cannot be successful in our industry if you cannot succeed in the US. That was ’94.
Robert Gottliebsen: I’m going to bring you back to the present. When you go in the past, we were a very efficient place to research. It was often cheaper to do research here than it was in America. Has that now been reversed? Is it cheaper to do research offshore than it is here?
BM: Yes. There’s no doubt that if you talk about the US. [In the] US there are some pockets that are still very expensive. I’d say southern California and probably Boston are still very expensive, but certainly I think it’s true that most of the workforce is less expensive in the US than our Australian, German or Swiss researchers because we do it in all places, but that doesn’t mean we’re not happy there. We are very happy with the work we’re doing.
RG: Does that mean that down the track your successor will be looking at whether he should do as much research here or whether he should do it in the States where it’s so much cheaper?
BM: Well, first of all, it’s not so much cheaper, but I think dollar for dollar it is a little cheaper. But research is about quality. It’s not about a numbers game. It’s all about where do you access great science? So we have significant relationships here in Australia with many fine medical institutes and scientists so we have a natural ability to do that. Where can I recruit the best scientists I can, the best doctors? In Australia we are well known and we can recruit very well. If I’m just another American company trying to compete against Merck and Glaxo and Genentech, I’m going to be in the pack [where] no one’s ever heard of me. So I get high quality staff here, and the same in Switzerland and Germany around Frankfurt at Marburg and around Bern; Bern Institute is a very fine university. So, it’s about the quality of the people that you’re getting and their natural affinity to you as an organisation. That’s what you want to create. It’s not about deciding it’s cheaper to set up in, you know, Waho, Texas or something. You know, that’s not what you want to do.
RG: Well, it’s a change in the game.
BM: There’s no doubt we’ll do more clinical research in the US because that’s where you’ve got the scale, you’ve got the FDA, etcetera, but I don’t think in of itself, Rob, there is change in the game, no, no.
SB: Can you talk a little bit about the payback on R&D? I mean you spend $350 million, $400 million a year on R&D, half of it here. What kind of benefit do you generate? Because I think that gets to the cost issue… the cost relative to the end outcomes.
BM: The outcomes, sure. Well, we’ve done extremely well in royalty income over a long period of time. We’ve probably generated almost a billion dollars of just pure royalty income on some of the science we’ve licensed. But if you look at our products in the market place today, nearly all the products that are generating our growth are projects that we’ve invested in, either improving existing products, new clinical indications, new geographies, or in fact novel products and I’d say at least 60, maybe even 60 per cent of our portfolio are products that we’ve developed in the last five to six years. So, our growth is on the back of our success in R&D and innovation.
AK: And how much of that is due to the fact that you’re working in plasma as opposed to synthetic proteins and drugs?
BM: We like the space we’re in and we think that the successful companies in our industry are those that have mainly specialised, whether it be plasma, whether it be in insulin, whether it be in other areas, so… vaccines are an example. The vaccine companies have done well. So, I think it’s consistent, Alan, with the view that specialisation and focus makes you make better choices and so, yes, I think we make really good choices because we have some extraordinary people in R and D and we have John Shine as our chairman that we make informed scientific judgements on the portfolio we do and that’s why we get the high quality return.
AK: But can a company like CSL specialise in two things, for example? Because at some point you you might need to diversify and develop another specialty.
BM: I think there’s no doubt that you do look for areas that are allied to the areas in which you operate. So, in hemophilia we’re moving from plasma products to recombinant. In areas of immunology we’re looking at some antibodies that would complement immunoglobulin. So you’re always looking at areas that are really closely aligned that you understand the therapeutic area, you know the mechanism of action. So, I think we have years, if not decades, of an ability to try and laterally grow. We don’t need to jump into a new area where it’s fraught with difficulty.
RG: Brian, you said in your report that you see the next phase as exciting. What events are taking place in the next two or three years that you think will be exciting?
BM: We’ve got a number of specialty products that we have in clinical trial at the moment and we really believe that they are both great for patients in some of the areas we’re working in to try to save patients from blood loss, as an example; in areas of easier treatment of patients in hemophilia and other diseases. So we have this breadth of pipeline that I think gives us confidence. Of course, we need successful clinical trials. We need stuff to work, but at the end of the day I’ve never been more confident that we have the breadth of portfolio and a lot of invented optionality inside that portfolio. You can’t ask me which of my four or five children I think is going to be the one that succeeds, but I am confident that some of them will succeed.
SB: Brian, apart from the tenure, the longevity, twenty-three years, the thing that is remarkable about CSL since you brought it into the public limelight has been the total shareholder return. It’s over twenty-five per cent; the best of any I think long serving CEO. Is it something about you? Is it something about the strategy? Is it something about the business that’s generated those kinds of very consistent returns to shareholders?
BM: Look, it obviously isn’t just me. I mean I think I had a wonderful asset in the skill base of CSL that I started with even though it wasn’t, you know, highly valued at the time. I think we had a deep understanding of the value drivers and the economics of the sector far better than many others whose business was imbedded either in a not-for-profit, like ZLB, which was owned by the Swiss Red Cross, or Aventis Behring that was owned by a very large pharma company called Aventis. So we understood the value drivers and had to create value in those businesses as global specialists and I think that’s the key that we’ve been able to turn. Plus, I think that we in our team understand the M&A process very well. We try to buy well when we buy assets because of course one of the big parts of TSR is making sure your purchase price is as low as possible. So, we obviously bought assets at a time when they were probably, you know, not fully valued.
SB: The economic research says that the longevity of the tenure actually is a driver of total shareholder return. Do you think that being there twenty-three years has actually been a value adder for the business, that length of tenure and the right person produces good results?
BM: I think that the consistency of purpose and the clarity of direction is very valuable. And also the relationships you have with your colleagues that you work with means that you make better judgements and I think that’s where longevity can be very valuable. That you really understand each other well, you understand when you’re looking at something what to do and how you’re going to add value. So, it is that consistency of purpose that I think is difficult to achieve if you’re moving CEOs around rapidly.
RG: Can I just put a bit of dampener on that for a second?
BM: You may, Rob, you may.
RG: Because one of the great things you did was to generate a vast amount of cash and you very effectively used that cash to buy back shares and things of that sort. Are you aware that the game has now changed and that as our population gets older they’re much less interested in buybacks and much more interested in pie distribution? And you’re proposing… If you go against that trend… I’m not criticising the past, but in the future you’ve missed the trend.
BM: Well, I think that we’ve got the balance right. I mean when we look at our global shareholder base, we have loyal Australian retail investors [who] have been wonderful for us, we have domestic institutions and we have a large institutional base offshore. The most tax efficient way for us to provide funds back to shareholders is through share buybacks.
RG: For them?
BM: Well, it’s not that different for the Australian domestic institutions as well because we don’t generate any franking credits. So, you’re really left with the question is ‘are we a retail stock for where dividends are important?’ I would have thought [that] if I was an Australian retail investor, yes I like my dividends, but actually I’m quite happy that the share price also seems to go up periodically. I would have thought they would have made more money with our share price going up than they would merely by focusing on dividends.
RG: We are seeing a very big change in what investment companies and institutions want because Australians are getting older and they do want income.
BM: Well look, I hear that and I think we, you know, we may take that on board, but I’d say that…
RG: Marius stopped it.
BM: But I would say BHP have a different issue. BHP have the issue [that] they’re like a pharmaceutical company that has a drug that’s a patented drug where they’re getting extraordinary cash at the moment, but they’re very fearful that the pattern is going to finish or in a mining sector issue that this windfall gain will stop.
What shareholders are saying in those circumstances, I would assume, is that it’s unclear whether they’re getting the fair share of this windfall gain because no one is sure how long it will last. That’s a very different issue [from] what I would describe as a growth company that’s investing in its future, is trying to balance all our shareholders’ needs at one time. We will retain the cash if we see opportunities to invest internally, so we like the optionality of that. So I think Rob, unfortunately I disagree with you. I think we’ve got the balance right.
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