CSL’s R&D Day
CSL held their annual Research and Development Day in October and provided investors with more information on their research and development (R&D) pipeline as well as the path to commercialisation for therapies currently in later stage trials. We think that CSL’s Research and Development Day provides investors with important insights into the business and the investment potential, considering the sizable spend the company makes every year in R&D. In fiscal year 2020, the company invested $922m in R&D of which $570m was spent on new product development. The total R&D spend grew 11% during the year and represented approximately 10% of group revenue.
There is always debate within the investment community about the valuation of CSL. The company generated ~$2.1bn of profit most recently, and the stock trades at over 40x next year’s earnings, which is a premium to that of other ASX listed companies. We argue that given almost $1bn is spent on R&D annually which drags down short-term earnings but benefits accruing in the future, investors need to focus on the scientific and commercial viability of this spend before judging whether the stock is expensive or not.
We think that the company’s R&D pipeline is particularly exciting over the next 3-5 years as there are potentially multiple key launches in areas including gene therapy, cardiovascular disease and treatment of COVID-19 as well as continued innovation and product launches in vaccines. Other than new product launches, the company continues to expand the uses for existing treatments, a pathway that carries much lower risk than developing new products.
We think that investors focusing on simple historical quantitative metrics such as price to earnings ratio misses the value in the company which is embedded in the substantial annual commitment to R&D. Investing in these R&D projects have no financial return to show for in the short term, nor are they all guaranteed to succeed, but given the company’s track record and proven process, we think the significant investment the company is making today is likely to add considerable value for long term shareholders.
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