Meet John Shine: the trail-blazing scientist who chaired CSL for 7 years, helping create a $71 billion global giant we can be proud of

• The best CSL moves: Gardasil, ZLB, Aventis Behring, Novartis flu and Ruide plasma business in China
• The regrets: US politics preventing Talecris acquisition and 2016 remuneration protest vote
• Lauds management prowess of Brian McNamee, Paul Perreault and unique Andrew Cuthbertson
• Supports retaining takeover prohibition which mandates Australian control of CSL
• Explains the logistics a governing a global bio-tech success story from Australia

World renowned scientist John Shine isn’t your typical major public company chair. He was first invited onto the CSL board by former CEO Brian McNamee in 2006 and went on to chair arguably Australia’s best public company during a marvelous 7 year period of growth, successful R&D and record profits.

Later this year Professor Shine will hand the chairmanship to McNamee after 5 years away from the company – a time when the leadership duo of chairman Shine and CEO Paul Perrault saw the share price almost triple.

CSL is a close as you’ll get to a flawless public company, and is set to soon surpass both ANZ and NAB in terms of market capitalization. John Shine is uniquely placed to reflect on Australia’s place in the bio-tech world and he’s broadly comfortable with the current Australian policy settings, save for the need to continue pushing hard to commercialise more Australian medical breakthroughs, something CSL has excelled at in recent years.

Welcome to The Constant Investor Chairman Interview Series.  I’m Stephen Mayne and this week we’re interviewing Professor John Shine, the Chair of Australia’s biggest pharmaceutical company, CSL.  Welcome, to The Constant Investor, John.

Thank you, Stephen, pleasure to be here.

Now, John, you’re an unusual ASX 10 Chair, in that you don’t sit on any other public company boards.  You’re a renowned scientist, a university professor, someone who has spent more than 20 years as CEO of the Garvan Institute.  Take us through that transition from medical research and academia to chairing a $71 billion global company.

Well that takes me back a fair way in a sense, Stephen, because life’s all about timing, as we all know.  I was fortunate to be at the University of California in San Francisco in the mid-70s when the whole gene technology developments were occurring and biotechnology was pretty starting.  So I was in the right place at the right time.  Fortunately, scientifically, I could contribute to some of that and that really set my career in motion very nicely.  But I did learn very early on about that interface between academia and industry in being involved with Genentech, one of the very first companies in the biotechnology space.

Then after I came back to Australia, all the action in molecular biology and gene cloning was still happening in California, so I went back to California and together with a colleague over there was involved in starting up a small biotech company called California Biotechnology, or Cal Bio.   We grew it from a few people to about 200 scientists over a few years.  I learnt again, a lot about the way to take basic research discoveries to a point where they were some sort of commercial value and what was needed to make a real product out of them.

I then came back to Australia for all sorts of usual personal reasons and at the Garvan Institute, where, as you mentioned, I have been in there ever since and so I’ve had a lot of experience at this academia industry interface at a time when a whole new technology was creating a new industry in biotechnology.  I was very fortunate really, but I think it did put me in a very good position to understand a company like CSL, and being Australian, being very proud of CSL.  When that opportunity came up I really enthusiastically embraced it.

What is the typical profile of other global, big pharma chairs.  Are many of them scientists like you or is it more commercial.  I mean the Americans obviously have their executive chair model, but as you move around the industry do you come across other people like you who have a background like yours but are chairing major public companies.

Yes.  It’s not unique although it is a bit unusual.  As you say, it’s much more common for individuals with a business background to chair large US companies because they do tend to have, as you say, that executive chair model.  But there are some fellow scientists out there, the chair of Gilead, Dr John Martin, is an example.  I think though, Stephen, what’s the more standard sort of profile is excellent outstanding scientists, especially in the US, tend to often be founders of small startup companies.  Then as the company develops to a point where commercialisation becomes much more real and important, they tend to sort of step aside.  A good example of that is Calimmune, our recent acquisition of a small gene therapy company in the United States, was chaired by David Baltimore who was a Nobel Prize winner and David did a great job in chairing that company through its early stages, but then, as I say, in quite a typical move as it got to a sort of point where business and commerce was becoming more of a driving force for the company, he stepped down.  That’s the typical sort of profile.

Other leading scientists, of course, are in very senior positions on the executive of big pharma but not so much always on the board.

Take us through the logistics of how you chair CSL.  The CEO, Paul Perreault, is based in the US along with two of the directors.  The headquarters is in Melbourne at Parkville and you live in Sydney.  How does it work logistically?

Look, it works well.  Basically, it’s because technology, I suppose, has made the world a much smaller place.  On saying that, of course, it’s never quite the same as being face to face and Paul Perreault, our CEO, does spend about – oh I think last count it was about 250 days a year outside of our US offices.  He’s truly a global citizen.  He places a high priority on being present on the different areas of the business regularly and he spends a lot of time in Australia given that we run and governed out of Australia.

The board also holds meetings as a matter of practice, Stephen, at different sites around the world.  Historically we’ve tended to visit the United States once a year, Europe, once a year because we’ve got major manufacturing plants in those areas.  But last year, for instance, we visited China and Japan.  Travel, Skype, navigating time zone conversations is really an everyday normal part of business within CSL and it works well at present.

Now, take us back to your appointment to the board in 2006.  What was the process that led to your appointment?

Well, the process was basically, I’ve known Brian McNamee, the then CEO, for quite a few years, being both Australians and being in the biotech space.  Brian had called me up and asked me whether I’d be interested in joining the board and would I be interested in going and meeting with the then chairman, Elizabeth.  I said yes and we had many interesting conversations and the rest is history, as they say.  A complex business like CSL does take a bit of time to understand and we’ve really benefited greatly by having directors from all walks of life that have been really committed to understanding it.

I’ve really had the privilege of working with two great CEOs and some very talented, strategic fellow board members.

Because you are right, there’s been a few key people who’ve served a long time.  Peter Wade, the first chair, did 20 years including many in government ownership.  Elizabeth Alexander did close to 20 years in total on the board and you’ve obviously done 12.  Then you’ve only had the two CEOs through the 24 years of public company life, Brian and Paul Perreault, and then Brian comes back as chair.  In terms of leadership it really is the five of you who’ve served the key roles.  That has been important, you think, having that consistency of leadership, because I can’t think of another company that over a 24 year period has had such stability at the top?

Well, look, that sort of stability is an important factor in success, I certainly believe, Stephen.  But you can only have that stability if you’ve got, you know, very good people in those roles and a very good relationship between the board and management and Brian, as you say, was an outstanding CEO.  He really built the company up from when he first took over and then privatised it and put it on the global – a seat at the global table.  He had been out of the company, of course, for about five years now.  But he and Paul have always gotten along very well and he returns as a trusted colleague of the board, and of his own successor, Paul.  We went through quite an extensive process of looking internally, externally, in Australia, around the world for the right person to be the next chairman and Brian was miles ahead of the nearest one.

Was it always in contemplation even when he retired five years ago that he may come back?  Or is it something that emerged more recently?

Look, I think it’s something that’s emerged much more recently, although I’d have to say, from the day he retired I think several of us in the back of our mind would have thought, gee, with the passage of time Brian would be a great chairman, but only in a fleeting sort of way.  It was really a more recent decision.  As you know, I will have been on the board for 12 years, chairman for 7 when I step down in October.  That’s enough time.  So it was important that we tried to plan ahead a bit for the succession and obviously, certainly in my mind, the first name that came to mind was Brian McNamee.

Tell us about the differences between the style of say Brian and Paul.  I mean obviously they get on well, but you’ve been a chair to both of them and now handing on to one of them.  Take us through their key strengths and differences.

It’s an interesting question, Stephen, because they are very different, but they’re also very similar.  The similarity is that they share a very, the same strong ethical base and the same strong focus on patients, and that the company should be there to look after the patients to improve their quality of life and if we do that, we’ll be successful.  They have a very similar culture, you know, their DNA is similar in that sense, in their value systems.  Their differences of course is that you know, Brian is probably a slightly more outgoing and certainly in the time of growing the company rapidly from a small base, Brian was very decisive and quick and would be fast to make decisions and push ahead rapidly.  Paul is a lot more considered, takes all the information in and then is very decisive and moves forward.

That sort of slight difference has actually been, I believe, very appropriate for the different phases of the company.  Brian has now had, as I say, five years since he was CEO, he’s been doing a lot of private equity work.  Internationally, he’s learnt a lot about what’s required on the international scale.  I think, you know, Brian and Paul and their relationship and their similarities and differences is now, I hope, a perfect formula for successful transition.

I want to talk about one other executive who doesn’t often get a mention but probably should, that’s Andrew Cuthbertson who’s been your long-term head of R&D.  Some analysts say that there’s no other big pharma company that they can think of which has had such a success rate at developing and commercialising new products and discoveries through the clinical trial process.  Tell us about Andrew, and how has CSL done what sort of no other company can do in hitting targets on R&D so many times?

Again, very good question, Stephen.  I think I should preface it by, you asked me earlier about it’s unusual to have a scientist as chairman of a major company like this and I said it was not unique, it may be unusual but not unique.  In the case of Andrew Cuthbertson and the head of R&D I think Andrew is unique.  I don’t know of anyone else in academia or industry who has Andrew’s wealth of knowledge of science, medicine and commercialisation and can balance them.  His personality is such he balances those often conflicting demands extremely well and the end result certainly has been that we’ve had an incredibly enviable success rate with our R&D projects, largely because of Andrew’s insight.  I mean also obviously he’s had a great team around him and the environment has been right.  The other advantage that CSL has had is that with our strong plasma business and the revenue it generates we’ve been fortunate in having the resources to apply to these new projects in a sensible way.  But full credit, absolutely, to Andrew Cuthbertson.  I think as Andrew gets closer to retirement too that’s another transition that we’ve been working on, but he will be very hard to replace.

A company that floated at $200 million and is now worth $71 billion, only $7 billion shy of both NAB and ANZ, so CSL is actually getting close to reining in one of the big four banks and leaping into the top five companies on the market. 

Very different companies, Stephen.

Yeah, well you’re right.  We all get quite confused by CSL because it’s not part of that traditional service sector oligopoly, the Coles/Woolies, big banks that investors analyse.  Do you have to treat your shareholders differently, like educating your retail shareholders, because it is such a complex and diverse beast?

Look, the communication with shareholders is always a very important area, obviously.  As the company grows and gets more and more complex and geographically dispersed, and in some ways even more diverse in some of our product portfolio, yes we do need to have an ongoing educational process with our shareholders because it isn’t simple.  Like many areas of human endeavour that are specialised of course, Stephen, sometimes the language just gets in the way.  You know, we all tend to abbreviate things at times when we shouldn’t if people aren’t in the area.  But communication is very important.  I would have to say that we’ve had enormous support from our retail shareholders throughout CSL’s development.  It certainly makes that communication a little easier, I suppose, where as you say the share price has gone up and up and up. 

We just need to focus on the fundamentals of the business which, as I keep coming back to, is making sure we’re there for patients and addressing and putting the right focus on what patients need and having good people and hopefully the rest will follow.

Well, you have been the best stock pick of all in the last 25 years and I dare say there’s quite a few, hundreds, perhaps thousands of millionaires in retirement who can thank the CSL share price, very much for that.  I want to ask you about Gardasil which has probably been the most successful vaccine ever developed.  If I’m looking around for, has CSL ever made a mistake, the only one that people can come up with is the 7% royalty to Merck was underdone with Gardasil and you could have got double digit figures.  So in other words, it’s been fantastic for you, best ever, but it could have been even better.  Is that a fair criticism in terms of your number one R&D product, Gardasil.

Look, I can understand the comment but you have to put it in the context of the time, too.  I mean Gardasil was, yes and again, a typical example of outstanding Australian research.  CSL was well-positioned to take that forward and do some development work, but the resources, not just the money, but the resources in the expertise and the networks and the connections that were needed to take Gardasil or any vaccine like that, through the massive clinical trial program and then, in a very competitive world, get out there and get to the marketplaces around the globe quickly.  CSL could not have done that at that point in time, Stephen. 

Merck was a very appropriate partner and I think the combination of the original research group, CSL and Merck has almost eradicated cervical cancer, so it’s been a great success story.  You can look at parallels in a way with one of our new large research projects at present, CSL 112 which is a product aimed at essentially dissolving cholesterol out of plaques after you’ve had a heart attack to prevent a second heart attack.  That cardiovascular market which is enormous in numbers of patients and of course, financially, CSL over the last decade has initially thought, well we can’t possibly take this all the way ourselves, it’s just too big an ask.  As we’ve gone over the years and that project has looked more and more successful, we’re now at the point in time where we, ourselves are taking it into phase 3, which we would not really have contemplated 10 years ago.  So it’s all about timing and your ability at the point in time to effectively commercialise these sorts of research discoveries against, in a very competitive environment.

Obviously your originally monopoly in blood was a foundational part of the business and now you’re the world’s biggest and most successful blood products company, I mean an absolutely powerhouse in the US with a market share of above 30%.  I want you to reflect back about overall government support for the science and medical industry in Australia.  CSL had a lot of it, obviously by that original structure, but in the current policy settings are you happy with the level of government support for science?

Look, yes, I personally am, I think the Australian government – both political persuasions – has been very supportive of science throughout the last couple of decades.  It’s true to say that Australia has a very strong basic scientific base in fundamental research in the universities and research institutes and the government has been very supportive of that.  It has struggled although it’s tried, to bridge that gap between the initial fundamental research discovery and translating it into a product of real commercial value and social value to the country.  That’s been due to a lot of reasons.  One is the relatively small population of the country, the other has been an historical shortage of true higher risk venture capital for some of these initiatives.  That’s improved a lot in recent times.  But another major component there, Stephen, has been the fact that in the US and in Europe where there have been large pharmaceutical companies well established for many, many years who have a large R&D base themselves, that R&D base has been available to interact with academia in those countries and span that gap between those earlier discoveries and commercialisation.

Although all the major pharmaceutical companies are represented in Australia, they’re mainly represented by marketing groups, commercialisation groups.  There’s really not much R&D of any major international commercial company here.  So CSL actually is about the only major company.  I mean we spend many hundreds of millions on R&D in Australia every year.  We need to even up our game a bit more to interact even more extensively with Australian research institutions to make sure we can provide that resource.  Not just the financial one, but the expertise in overcoming that sort of gap between basic R&D and the formal product.

I want to ask a related question to that.  So the national champion argument, which you clearly are, and you’re doing probably a majority of all R&D commercialisation spending, you’ve got an unusual clause in your constitution which effectively prevents foreign takeovers, and there’s also some federal legislation limiting that.  If I was being a cheeky shareholder activist and I put up a resolution at your upcoming AGM to get rid of the restrictions on foreign shareholders.  How do you reckon that would fly, because I think it’s never really discussed?  Do you think the patriotic argument would prevail or do you think you’re now worth $71 billion, why on earth do you need any takeover protection argument would prevail?

Look, I hope the patriotic argument would prevail.  We are very Australian, and you’re quite right, it goes back to, I think 1993 when the Commonwealth privatised Commonwealth Serum Laboratories, two thirds of the directors must be Australian citizens and the chairman must be Australian and all of the voting restrictions you just mentioned.  While we are truly Australian, Stephen, there is also a very practical reason why I think for the foreseeable future we will certainly remain very much Australian and that is because of our somewhat unique position that we were just discussing.  In Australia, CSL has a unique opportunity to access Australian research in a way that would really not be quite possible if we were an overseas company.  At this point in time, in the whole biopharmaceutical area, access to leading research ideas, leading research projects, leading research scientists is at a premium and is very competitive.  If Australia has a great resource there, and if we’re the major Australian company, in Australia, proudly Australian, hopefully we can access – we do now, we can access even more of that resource.  A great opportunity that we would not want to easily give up.

From time to time, of course, the board does discuss the question you’re just raising, but whenever we do it’s a fairly brief discussion and it’s very clear that there’s no real disadvantage to us to be retaining the status quo and many areas of great advantage to us.

I want to ask you briefly about drug pricing.  In the global industry I think about 60% of the cost of drugs is funded by governments, 30% by insurers and 10% by patients.  Are you confident that the governments have got the ongoing financial wherewithal to absorb any ongoing price rises for drugs?  Do governments ever look at your share price and say, hang on a minute, why are we paying you so much when you guys are making so much as a public company?

There’s always, around the world in every country, governments are under enormous pressure with increasing healthcare budgets to try to limit the cost of healthcare and pharmaceuticals is a relatively easy target.  It is a constant discussion with governments to get a fair price recognising the cost of investment that are required to bring these drugs to market, Stephen.  I mean a very good example for CSL is that we recently launched a fairly new product, one of our new genetically engineered long acting blood clotting factors, called IDELVION, which is really transforming the lives of people with haemophilia B.   Kids only have to take an injection once every couple of weeks instead of every day and they don’t get bleeds.  Now, that particular drug, in a scientific sense, it was a very straightforward genetically engineering activity of joining one gene to another and then producing the product. 

That took something like just over 10 years and certainly probably about $200 million to get to marketplace.  The company simply won’t invest in that sort of activity if it’s not making a fair price on its pharmaceuticals.  That doesn’t mean that there definitely shouldn’t be any sort of price gouging or taking advantage of the situation, but governments are very sophisticated these days.  They will argue the price down, the company will provide its evidence for justification of that price as far as health economics go, it’s a constant ongoing dialogue, but I think one that’s working well.

John, I always finish up by asking our chairs their favourite deal that they’ve been involved in, or decision that they’ve made on a board that’s added value for shareholders, and also any corporate regrets.  I’m sure you’ll probably struggle to come up with any mistakes or regrets at CSL, the story has been so good.  But take us through, your favourite deal, over 12 years on the board and any regrets during that time?

Gee that’s a tough question about favourite deal, Stephen, one of the reasons being that with the deals, especially in our sort of industry, there’s a fairly big timeframe involved between the deal and you seeing the real sort of commercial prize at the end.  If you go back to before my time, the acquisition of ZLB in Switzerland and Aventis Behring in the US, which set up CSL as the world’s, as you correctly say, leading plasma products manufacturer.  They were fantastic deals.  In more recent times and I think future chairs, and CEOs and shareholders will have to make judgments on this, but I think the acquisition of the Novartis flu business, which we combined with our flu business, to now call Seqirus, which makes us the second largest flu vaccine producer in the world, I think you’ll find that will be a great success.  I think also clearly there’s some smaller ones like Calimmune, the gene therapy company I mentioned before, which is setting us up for the future of gene therapy, there’s been several other smaller ones.  But I would look probably, if I sit here today, I think the acquisition of Ruide the Chinese plasma manufacturer may turn out to be one of I hope, our big successes.

In that China, we all know China as an incredibly rapidly growing country, there’s a big need for a lot of our lifesaving products there.  We really needed to be in China strategically, I think we’ve made a very appropriate acquisition at the right time.  We will learn a lot and hopefully it will be very successful and grow, but I think when we look back, the acquisition of Ruide in China will be quite a milestone.  I could go on and on, there’s too many good ones.

There’s so many good deals.

On the – what was the other one, the mistakes?

The regrets, any of them?

The regrets.  Yeah, I think probably they’ve been few and far between I would have to admit, primarily because we’ve had such a great management team and a really cooperative board.  Probably two things spring to mind.  The first regret was our attempt to acquire Talecris which was a large US-based plasma manufacturer, which would have added enormously to our capacity in that area.  It made a lot of sense, there were a lot of synergies that would be involved.  We always knew it would be a little difficult and unfortunately it was just at that time in American politics when they looked very unfavourably on the sort of mergers of some of these companies, and so it was eventually turned down by the regulatory authorities there.  It would have been nice, but it didn’t happen, so that was a little bit of a regret.

Probably the other regret in more recent times is the fact that we received a no vote on our remuneration report of just over 20% at the AGM before last, Stephen, and clearly we hadn’t explained to our shareholders clearly enough why we needed to change some of our remuneration structures.  This was simply because over 90% of our revenue and our profits now comes from overseas.  10 years ago, when we were a much smaller company, our senior executives that populated our overseas physicians were pretty much all Australians who’d gone overseas as the company grew.  So we could stick with an Australian based remuneration structure.  However, now, nine out of our 10 senior executives, more or less, actually seven out of nine, or eight out of 10 now or something are based in the US or Europe.  In order to be competitive in these marketplaces we simply have to change our remuneration structure.

We needed a larger degree of long term incentives and probably an even lower based salary, perhaps, the structure had to change.  We changed it because up until then we’d been band-aiding it everywhere to just try to make it work.  The shareholders didn’t quite understand it.  We got a strike vote, and I think we’ve learnt quite a big lesson from that, as you had mentioned earlier.

Because you did fix it then, didn’t you?

We needed to communicate a lot better.

Yeah, but the next year, last year, it came back to the usual 90-something percent.  So obviously you dealt with the issues there.

I think we fixed the problem, but when you ask for regrets, I’m sorry that happened.

No one likes a strike, particularly when you’ve made so much for the shareholders.

Yeah, and we didn’t expect it, but again, perhaps we got a bit too complacent in our communication with shareholders.  Hopefully we’ve now rectified that.

Yes, no I think you have.

But there’s been lots of good successes.

There has, more than most companies can talk about.  Look, John Shine, we’re out of time, so thank you very much for joining The Constant Investor, congratulations on your 12 years on the board and a remarkable seven years as chair where you’ve delivered in spade for investors creating a $71 billion company that all Australians can be proud of.  Thanks again.

Thank you and it’s been a great journey for me.

That’s John Shine, the outgoing chair of CSL.  This is The Constant Investor Chairman Interview Series, I’m Stephen Mayne and we’ll see you next time.