Biotech and Pharma

Australia’s CSL warns of biotech bubble

Jamie Smyth
CSL employees.
William West | AFP | Getty Images

CSL, the Australian company that recently bought Novartis' influenza business, has warned of a "biotech bubble" amid a frenzy of mergers and acquisition activity across the healthcare sector.

"You are seeing huge amounts, billions of dollars, being spent on technologies and development programs that really have not been proven," said Paul Perreault, CSL chief executive.

"I see the premiums they are paying and people need to be careful."

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There is growing debate over whether a bubble is developing in biotech after the Nasdaq Biotech index nearly doubled to 3,807 over the past two years.

This has coincided with a wave of M&A activity in the pharmaceutical and healthcare sector, including Shire's $30 billion hostile takeover approach last week to US drugmaker Baxalta — a key competitor of CSL.

"The big pharma companies have a lot of patent cliffs they are running into so they are struggling for growth," said Mr Perreault. "They are investing in more in early stage research and development and biotech companies, which in my view has created a bit of a bubble."

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Mr Perreault described CSL as "one of the biggest companies that nobody has heard of" but the former government-owned manufacturer of vaccines and plasma protein biotherapies has become a darling of the Australian Stock Exchange. It is due to report full-year results on Wednesday and is trading on a price/earnings ratio of 22 times forecast 2016 earnings — on par with the sector but above the ASX's average forward p/e ratio of 16.

CSL is the best-performing top 20 company on the ASX over the past 12 months, with its shares surging in value by 50 percent to A$96.36. Its stock price last week briefly surpassed A$100 when CSL closed its $275 million acquisition of Novartis's flu business.

"We've been in the flu business for 100 years. This deal gives us the scale and ability to globalize the influenza [treatment] business," said Mr Perreault. "It makes us the second largest in the space."

CSL bought the Novartis flu business when the opportunity emerged during a $20 billion asset swap between Novartis and GlaxoSmithKline. Mr Perreault forecast combined annual sales from the integrated flu businesses will reach $1 billion within three years, up from $650 million.

Andrew Goodsall, UBS analyst, said the price looked good and CSL has a strong record of integrating its rare acquisitions.

"We are very choosy. Just because I have money burning a hole in our pocket doesn't mean I have to go out and buy something," said Mr Perreault. "It is really hard to do something that really adds value. We have an organic growth plan and really innovate in our space."

Over the past five years CSL has invested $2 billion in R&D and employs more than 1,000 scientists. Its purchase from Novartis gives it access to cutting-edge research, laboratories and products, including its quadrivalent influenza vaccine, which has been submitted for approval to the US Food and Drug Administration.

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The vaccine targets four strains of flu virus, rather than three, which improves its effectiveness even as the virus mutates during a season. Last year, for example, just 30 percent of flu vaccines were effective, said Mr Perreault.

Mr Perreault said CSL's core blood plasma business offers growth opportunities with two new hemophilia drugs due to be launched in the next calendar year. He said a new drug called CSL 112, used to treat heart attack victims and prevent secondary attacks, is undergoing safety trials.

"That would be a blockbuster if it hits," he said.

UBS's Mr Goodsall said Shire's bid for Baxalta suggests big pharma may see opportunity in the blood plasma sector and could generate interest in CSL. However, the company's high valuation and army of 100,000 retail shareholders in Australia may complicate any foreign takeover bid.

"I'd be surprised if we weren't on everyone's list," said Mr Perreault. "But I'm not sure where they would see the synergies. We are extremely efficient and a pretty flat organisation: there are no private jets."