CSL's new chief executive tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:
Stephen Bartholomeusz: Thanks for joining us, Paul.
Paul Perreault: No worries.
SB: You’re probably sick of this by now, but hopefully you realised from the day you were appointed that everything you did in this first little while is going to be benchmarked against your predecessor Brian McNamee. If you think back to the difference between your style and your ambitions for the business to what you’ve inherited and what Brian was like, can you articulate those differences?
PP: That’s a great question and certainly it has come up before. People ask me about big shoes to fill and I tell them I have bigger feet. But I would say that Brian and I differ in terms of our experience and background. When I was first part of the CSL group that came over with the Aventis Behring acquisition, my expertise was really in global commercial markets – it was sales, marketing, business development and operations, so I had a broad range of things. And Brian’s, as we know, was heavy on the science side.
Now, I have the science, but I’m not an MD, so there’s a difference there. And Brian’s passion about really getting the organisation started with a global footprint and really establishing that footprint around the globe is what he did, and that’s how the company really grew. My expertise is really about taking that footprint and optimising it. And when I talk about commercialisation of our strategy it’s really about the sales, the marketing, the market expansion, the portfolio expansion that’s been established from Brian in the beginning. So it’s really taking that strategy and taking it to the next step.
AK: Does it mean that inevitably the growth of the business will be less under you than it was under Brian?
PP: Not at all. What it means is that there are opportunities for us continue to expand, so the growth will continue. I’ve been a major part of the strategy development for the company with Brian over the last five years, so I sat on the strategy development team and we debated these strategies back and forth. My job now is to really take the company to that next step and it means that there are plenty of growth opportunities. In fact I think we’re still underdeveloped in our developed countries.
SB: Just on that theme at the moment. In the last few years the success of CSL and the growth of CSL has come from the commercialisation of the specialty products, the higher-margin type products, rather than sort of generic plasma which has come out of your business. Is there that much scope left to do that more broadly across CSL geographies?
PP: Well, I’m not sure that’s absolutely accurate. The growth of the business has come a lot from what I would call our core marginal products, so the growth in immunoglobulin over the last number of years and the growth of albumin…
AK: Immunoglobulin is IG, right?
PP: Yes – I’m sorry. Immunoglobulin is used for immune deficiencies and such, so the immunoglobulin business has expanded tremendously as it’s grown and we’ve actually grown faster than the markets in that particular category and we’ve become the leader in immunoglobulin sales. Albumin is the same way. We’ve expanded into China. We’re now the largest foreign supplier of albumin in China and also in Japan with a 40 per cent share in Japan of albumin. So the core products actually have been driving growth and the specialty products have been driving on top of that.
But not everything grows, so there are products also that haven’t grown and they’ve been supplemented through these specialty products and the organic growth from the core products. But even in those categories we are underdeveloped in some of our more developed countries including the US, Europe and Australia.
Robert Gottliebsen: But hang on – in the US, you’ve been in that country and the business you’re in has been in that country a long time.
RG: And you’re a sophisticated company. Why would there be a vast growth opportunity in the US?
PP: It’s interesting because I was born in the US and people talk about it as a sophisticated country, and if you live there you learn that there is some unsophistication in our country. A good example – we just launched Kcentra, which is a product that treats coagulation in bleeding, and this is used in people that are taking Coumadin or Warfarin to thin their blood and so this product reverses bleeding when these patients get into trouble.
That product has been available in Europe for 20 years. It’s been available in Australia for the last 15 years. But it’s never been in the US. It’s the first change in transfusion medicine in the US in 50 years. So that’s an example where people have this idea that the US has everything and we understand the sophistication of what happens, and in fact in some areas they’re not as sophisticated and they haven’t developed these products.
RG: But those base products that you were referring to, immunoglobulin – that’s surely being felt in the US?
PP: It is not. In fact, the primary immuno-deficient community in the US continues to expand, so the patient organisations that advocate for these patients continue to have programmes on diagnosis and awareness. This is a rare disease area. We focus on diseases that are rare and that are specialty. In that vein, physicians first have to understand the disease and most physicians are trained to look for horses, not for zebras. And so what happens is that they look at the obvious.
When it comes to the rare diseases and what really is the underlying cause of these diseases, they may have been masked by overuse of antibiotics. That’s a big area in fact where primary immuno-deficiencies that immunoglobulins are used to treat get lost because of the overuse of antibiotics treat symptoms, because these patients get sick often – they get ear infections, they get pneumonias and they see a physician and they give them antibiotics. They get better. Six months later they’re sick again; they get another course of antibiotics. You really have to dig in and say, is there something underlying here that I’m missing? And that’s the zebra, not the horse. That’s when these patients get diagnosed.
So we have seen an increase in diagnosis of primary immuno-deficiencies in the US that has grown probably double in the last 10 years. And you would think again all these patients are treated. Haemophilia is a different story. In developed countries like the US, you can usually identify a patient with haemophilia either because it’s in the family already or, when they do a circumcision or a heel stick for blood, the baby continues to bleed. So haemophilia gets diagnosed quite readily in the developed countries, but these other diseases, it’s very hard.
AK: Is there any opportunity for you, do you think, to expand your range of products without stretching the business too much?
PP: Absolutely. I think that we have a large range of products that were developed in Europe. For instance, when CSL bought Aventis Behring – Behring comes from Behringwerke, which is the original company in Germany in Marburg where we have one of our major sites and this was named after Emil von Behring, who was the first Nobel Prize winner in medicine, so a lot of history in terms of medicine and development of medicines.
And those products in Germany were developed through quite a number of years, and that’s where the speciality product portfolio that you mentioned earlier where we’re seeing a lot of growth, has come from. Because these products were available in Germany for many years and these are things that treat acquired swelling in patients called hereditary angioedema. It’s for things like fibrinogen, which helps clot the blood, and the specialty product Kcentra, which is a combination of these coagulation factors that reverses bleeding.
So expanding that portfolio into countries, the issue is you have to do the clinical trials. In the US it took seven years to finish this clinical trial to get this product approved. These things don’t happen overnight. So there are opportunities – some of them mid-term, some of them short-term and some of them longer-term – and that’s why I think our growth strategy that we started off asking about is going to continue. I think there is plenty of room for growth in the developed markets.
RG: So do you think the share market is right in pricing into your shares a high growth factor in the medium term?
PP: I think that the markets are appropriately looking at our company as a growth company and I think that we have a short-, medium- and a long-term plan to continue our growth.
RG: So therefore, will you continue what Brian and his board did to buy back shares? It’s been a huge program from CSL and made your company a lot of money, but as the shares go higher, it gets higher risk.
PP: Sure. I think we have to look at optionality, and with our capital management we’ve been very, I’d say, strict about how we manage our capital. And a company has to, in order to survive long term. So we have to give ourselves options.
The idea of share buybacks is really a board issue. We have to go back to the board and say, ‘Okay, what do you think? And what’s the accretion, and where do we think the value is?’ We continue to pay dividends, and we’ll continue to do that for our shareholders, and we continue to invest in the business.
We invest in R&D, and you’ve seen our R&D spend increase every year. We invest in capital. We’re building new plant around the world in Switzerland, the US, Germany and here in Australia where we’ve recently completed a new facility at Broadmeadows for immunoglobulin, as well as our biotech facility. And we’ve invested in expansion of our plasma collection, so we’ve added new centres in the US because, you have to have the raw material in order to fill the plants. And we see that growth continuing, and so we’re investing in the very front end of the business.
And lastly I’d say our commercial aspect – and when I say commercial, it’s come to light on me that different people take that differently in different countries, but what I’m talking about is the actual sales and marketing of the products in these geographies. And we’ve invested, for instance, in a new sales force in the US just recently for the launch of this new product because the customer base is different than the sales force was currently calling on, so we needed more expertise in terms of getting these products sold and marketed. So investment in all these areas is really part of that growth strategy.
AK: Is the blood collection in Australia capable of keeping up with the demand with the way the system is set up here, which is obviously quite different to the US?
PP: I think it’s a great question. The blood system here is, I think, doing a fantastic job of trying to make sure that the balance is right, because the government obviously has pressures – as all governments do around the world – and we actually deal with the Red Cross systems across many countries, Australia being one of them, with the National Blood Authority and Australian Red Cross Blood Service. It’s fantastic organisations that work well together.
I would say that the ability to collect the proteins in plasma and/or blood is difficult for most countries around the globe. I think that the optionality of trying to increase collections – which they have done – and also looking to how you can supply the right amount of product to the patient base here in Australia is a balance that is for those groups as well as the government to understand in terms of funding.
AK: But do you think the Australian government will eventually have to think about paying for it? Allowing you perhaps to pay for blood?
PP: I don’t know about that. I think, if anything, if there’s a demand in the market for these products, then they’ll look to source those products. I think that will be the first step and they’ve already done that. Where some of the demand exceeds the current supply from the source here in Australia, they’ve already topped up with other products coming in and being imported, so I think that’s the first step.
SB: Paul, you referred to your sales and marketing capabilities and the global footprint you’ve now got earlier. In the past with some of the bigger products that you’ve developed out of Parkville, you partnered and allowed someone else to distribute and you just collected a royalty. Given where CSL now is in its development, are we likely to see less of that in the future?
PP: Well, I think it depends. And of course Gardasil is a great example of a product that came out of development within CSL and then partnered, and it’s been a great contributor to the growth of CSL, but they’re hard to come by I guess is my comment. They’re not easy to do.
We do have quite an extensive science group here in Australia and our group at Bio21 here in Melbourne, in Parkville, they do fantastic work with the university and others to identify these things. And when we acquired Zenith a number of years ago we really gained a lot of capabilities with the monoclonal and antibody side of the business. So the antibodies that we have, some of them we will look to commercialise, others may not be in our space.
The one thing about CSL that I plan on continuing is an unrelenting commitment to understand the science that we deal with and making sure that we believe in the science if we’re going to take these products further. Sometimes these products would be better placed in someone else’s hands because we don’t understand it as well. We’ve developed it to a point and then we can go on. So I think it depends on what antibodies are developed and what biotech products we’re able to go. I mean certainly our recombinant haemophilia portfolio, which is part of our growth in our current R&D portfolio, we’re world experts in coagulation. We understand haemophilia. Those we can do ourselves.
SB: I was going to ask about that because in your R&D pipeline that’s obviously one of the most interesting areas and the market. As I understand it, it’s a really large one, so is that potentially a game changer for you?
PP: It certainly is part of the growth that we will see in the longer term, so mid- to short-term I think organic growth continues and that will continue through a longer term as well, but certainly we see the benefit of this recombinant haemophilia portfolio as adding to the value of our business. It will be a driving force, sure. It’s a big market.
RG: Your biggest raw material is obviously blood products like –
RG: Plasma. Can you see a time in five, 10, 20 years where the same products are produced without the complexities of blood plasma and we produce, if you like, artificial…?
PP: That’s also a great question because that’s something we think about constantly. One thing that gets companies in trouble is a bit of hubris, and certainly CSL has been very, very successful, but you can’t rest on your laurels because there’s always somebody trying to develop something new and they see market opportunity.
If you look at the immunoglobulins, certainly people would say, ‘Boy, I’d like to have a piece of that market.’ It’s a growing market. It’s a large market. These are expensive medicines, so this is something from a commercialisation standpoint that would be attractive.
I think that there are emerging technologies that are yet unproven that we need to keep an eye on – and we are. And so we don’t ignore those, and we are constantly scouring. And part of what our group at Bio21 does is they look at emerging, and what we call disruptive, potential technologies that could interfere with our business later on, and do we need to be on the leading edge of that? Do we think the science is far enough along that maybe we want to invest in that, which is also something that we could utilise our capital for, which again gives us that optionality. And we do look at that.
The immunoglobulins are interesting because they’re what we call polyclonal, which means that as opposed to a monoclonal or a one antibody, they affect all different types of receptors across the human system in the immunology sense, and there are so many immune mediated diseases. It’s still, I think, scientifically unproven exactly where the immunoglobulins work, so the actual mechanism of action other than replacing these antibodies that you don’t have is still quite unknown. So they’re very complex. It doesn’t mean that there won’t be technologies that can replace it and so we’re constantly keeping an eye out.
AK: A related question to that is do you think you need to in some way get a position in stem cells and stem cell research?
PP: That’s a good question. I really don’t think that it’s progressed far enough yet for us to be able to invest because we don’t have the expertise on stem cells within our organisation. So I think we’ll keep an eye out on it.
AK: But you could acquire it.
PP: Oh, we could, we could. But again, you look at pharma companies, right. So let’s separate CSL, who is seen as a pharma company, certainly here in Australia because it’s in pharmaceuticals – and that’s fine, but you really have to separate what we do in the specialty and rare disease areas from somebody like Pfizer or a Johnson & Johnson Janssen company.
And what they’ve done is they’ve acquired things to grow, and they’ve acquired a lot of things that they didn’t know much about, but they’ve said, ‘Well, we can buy their capability.’ They get bigger and then they can’t grow on top of that, and they end up splitting it off again. So what did Pfizer recently do? It cut off nutritionals, cut off animal health after they spent all this money to acquire.
So yeah, you can acquire, but what are you acquiring, and why? You have to have somebody internally that understands the CSL DNA and understands what we think is going to add value to the system, and if we don’t have those people, you can acquire people, but a lot of times you’re acquiring people that already have the biases. So, think about when people do acquisitions, look at how and why they do acquisitions. It’s usually done from a position of weakness, not from a position of strength. If you have a strong strategy, then you can be a bit choosier about the value you’re paying and what you’re acquiring.
AK: That’s one of the most interesting comments I’ve heard. That’s very interesting.
PP: Well, I think it’s true if you look at it. You always want to ask yourself, why did somebody do that? Why did they buy that company?
AK: And the idea that they were doing it from a position of weakness is…
PP: They have no other strategy many times, other than ‘I’d better buy something.’ And you hear that all the time. People are like, ‘Well, they’d better do this, or they’re going to have to do this, or they’re going to have to do that.’ CSL is in a great position where we don’t have to. We’ve got a great strategy, a great organic growth strategy, a great pipeline in R&D that we will commercialise over the next number of years, and so we have time and optionality.
And Brian and myself through the last few years, when we look at our strategy and we talk to people about strategy, it’s about having optionality. Strategy is not binary. It’s not, ‘Here’s the strategy, we’re going to just stick to that no matter what.’ That’s not the way he acquired ZLB and firm – it’s not the way he acquired Aventis Behring. Things happened. He was able to shift, move, change strategy, change course, and I don’t think CSL ever started out to be as big as we are today, but evolved that way because we had optionality. And now we’re in a position of strength to be able to make sure we make the right choices.
SB: We spoke to Brian last year and we asked him about the positive correlation between CEO tenure and shareholder rewards, and he said it wasn’t about the longevity of the tenure, it was about the clarity of purpose and the shared vision within the company – something along those lines. An understanding of direction. You obviously believe the same things.
PP: That’s where we don’t differ. Clarity is extremely important for an organisation and I’ve been described as somebody that will tell you exactly what I’m thinking, that you don’t have to guess where I stand. You’ve met Brian – I would say he was the same. I’ve never wondered where he stood on an issue; he was always quite direct. But it’s not just the directness, it’s understanding what the underlying cause and purpose of what you’re doing is.
For me, in my experience, it’s about the patients. Because without patients, we don’t have a business, right? We don’t have a business if there weren’t patients that we were serving with these product. And these are not discretionary products, they’re life-saving, life-extending products. And that differentiates us from big pharma and the mass, what I would call primary care audience.
I used to be in big pharma years ago and I sold cough and cold medications and marketed those, and they’re great and they help with your cough and all the rest, but it’s probably not lifesaving or life extending. When a haemophiliac starts to bleed, they’d better treat the bleed or else they’re going to have major issues, if not even immediately, then long term, or their joints will deteriorate.
So this is something that I feel strongly about and passionate about is that we have to understand our customers. We’re very close to our customers. The commercialisation globally is such that we understand where the customers are and where the demand is, where we can assist in terms of diagnosis and awareness of these diseases because we are actually creating markets in many countries where GDP is now risen in these countries to a point where the healthcare system will pay for products in the rare disease space because that’s how these countries are evolving.
So, we’ve entered recently Eastern Europe and Hungary, Poland and the Czech Republic, and these countries now have a level of GDP and a healthcare system that can support the rare disease space areas in some of these arenas, so with haemophilia and with immuno-deficiencies, so we start to expand into those areas. So it’s market expansion, it’s portfolio expansion. It’s R&D commercialisation. All of those things will lead to our growth.
RG: Just in a snapshot, how does your strategy differ from Baxter?
PP: I wouldn’t call Baxter a pharma company, I’d call them an acquirer of assets. I would say that they don’t have the focus that CSL has at all. I’d say that they have a business that does plasma therapies and a business that does recombinant therapies, and even those two businesses don’t talk to each other really, like we do within CSL. We have one business, one focus and I’d say the focus and the commitment, the unrelenting effort put on being efficient, making sure that we watch the dollars and we meet the spend and then we deeply understand the science.
I would say that you can tell where somebody like Baxter is also when – it’s a bit quicker than the brief answer you asked me for, but if you look at Baxter and how they’ve evolved and now they’re building another new plant, but it’s after they’ve had some difficulty supplying the market. I would say they didn’t plan well enough ahead. Hopefully we don’t make those mistakes.
AK: Thanks very much for joining us, Paul.
PP: Thank you very much.
RG: Thanks, Paul.