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It’s fair to say that no-one foresaw what would happen next. The market, the commentators and most of the mum and dad investors who would go on to buy their first shares through the 1990s were more focused on CBA, Qantas and Telecom, as Telstra was then known. But it was CSL that went on to become a global leader, and an investment success story for the ages.
In the first part of a series starting on Monday, the Financial Review examines how CSL became a $145 billion international powerhouse as part of an ongoing focus on Australian businesses going global. (This CSL series follows those on Macquarie Group and Lendlease.)
When told in numbers, CSL’s success can be summed up by its stock price, which – when splits are accounted for – is about 400 times higher than when it listed. Telstra shares, by comparison, are trading at less than twice what they listed at in 1997.
‘We were a bloated bureaucracy’
Installation of the penicillin seed tanks at CSL in 1947.
Commonwealth Serum Laboratories was established during World War I to ensure plentiful supplies of vaccine if an epidemic broke out.
From the outside, McNamee knew Commonwealth Serum Laboratories was in trouble. Despite recording the best pre-tax profit growth in the commission’s history (up 69 per cent to $11.5 million) in the year to June 30, 1989, this came off the back of years of minimal profits. It also had very little intellectual property of its own and was struggling to retain staff.
But when he walked into the dated Parkville facility, with its vinyl tiles and stainless-steel desks, it quickly became clear CSL’s situation was worse than he had garnered.
“We were running the risk of being a museum piece of biologic manufacturing,” McNamee recalls.
“It had had negative cash flow for the 10 years before. It really had no future … We’d already lost insulin, penicillin, and much of our business had been eroded by competition.
“We were a bloated bureaucracy … that had never developed a new product in a global market where you needed innovation, and all our plans were under-scaled and old.”
Founded in 1916, the Commonwealth Serum Laboratories was established by the government to help meet the country’s pharmaceutical needs in World War I. Not unlike the situation 104 years later when COVID-19 struck, traditional supply lines were being disrupted and there was a need for self-sufficiency.
The government bought a farm on the outskirts of Melbourne and constructed laboratories, stables and a home to house its first director, William Penfold. With 20 staff, it began making antibody-based treatments for horses against diphtheria and tetanus, as well as smallpox vaccines.
It once again played its part for “Team Australia” during World War II, when it established penicillin production in the country in late 1943. By April 1944, it enabled Australia to be the first country globally to provide penicillin to the public.
Its influence as a government-owned entity peaked in the 1950s when it was manufacturing the polio vaccine, a mix of human and veterinary medicines, anti-venom for a range of snakes and spiders, insulin, penicillin, and some blood products.
At this time, if a member of the public had heard of CSL, it was because of its anti-venom work.
In the 1970s and 1980s, when global cold chain distribution channels were established, CSL suffered. Suddenly anyone could import vaccines and biologics from overseas.
So troubled was Commonwealth Serum Laboratories that soon after McNamee arrived, Andersen Consulting was hired to conduct a scoping study, which valued the business at just $23 million, including its land.
“It operated predominantly as an organisation … that went around the world with a technology begging bowl, saying ‘will you give us the licence to your XYZ product, we’ll sell it to the Australian market’,” McNamee says.
“The trouble is that really only takes you so far. We were being crushed by our inability to innovate.”
When McNamee flew to Washington to try to license Baxter products, no one turned up to the meeting.
So poor was CSL’s reputation that when McNamee undertook his first world tour as CEO in the early 1990s and visited the company’s vaccine partner, global pharmaceutical giant Merck, he was informed they were planning to terminate the agreement.
In a blow that would reverberate in McNamee’s memory for decades, when he flew to Washington to meet with pharmaceutical company Baxter to try to license some of its products, no one turned up to the meeting.
The crux of CSL’s problem, McNamee says, really came down to one big thing: its government ownership.
“The organisation had a really tedious public-service mentality, in the sense that they were used to a very hierarchical structure where the top of the organisation would tell them what to do … they were waiting for the minister to tell them what [they] wanted.
“The organisation had drifted into a situation where it was not really viable.”
For staff working at Commonwealth Serum Laboratories, the atmosphere was depressing. When Gordon Naylor, who would go on to become one of the key executives in CSL’s history, joined the business in 1987, he thought he’d made a huge mistake leaving his previous role at Ford, labelling CSL as “moribund” and having “lost its mojo”.
“For a long time there was the feeling that this was just a dog. The whole organisation was a dog and the blood products division was the worst of it,” he says.
In the four years between taking on the top job at Commonwealth Serum Laboratories and CSL listing on the ASX in 1994, McNamee got to work restructuring the then 1200-person organisation.
It had four divisions – namely, blood products, animal health, diagnostics (which included its reagents products) and pharmaceutical (which mostly manufactured products licensed from overseas).
“When we started looking inside, we found some gems – be it people or products – that gave us a chance,” McNamee says.
One of those people was now deputy chief financial officer John Levy, who had started at CSL in 1989 as an accounts payable temp, but has since worked on every M&A transaction in the company’s history.
Deputy chief financial officer John Levy started at CSL in 1989 as an accounts payable temp. Eamon Gallagher
“This wasn’t a commercially focused organisation … in 1991. I remember a town hall Brian did in the canteen where he got up and talked about the focus of R&D as commercial rather than scientific, and people were shocked by that,” Levy says.
“He bought in some great people, [including renowned infectious disease scientist] Ian Gust and others, to drive that change. But we had a solid leadership team who believed in what Brian was seeking to achieve and ultimately Brian’s vision was that to be successful, you’ve got to get out of Australia.
“A lot of the people who didn’t want to be part of a commercial organisation left.”
Plasma becomes a ‘turning point’
While internationalising the reagents business and the animal health business, a new opportunity opened up that would lay the foundations for the future of CSL.
The government was building a plasma fractionation facility – which splits blood into its component parts – in Broadmeadows, Victoria, spurred by the threat of AIDS and an increased public demand for safety.
It was a particularly sensitive issue for CSL, which had manufactured blood products that infected thousands of Australians with Hepatitis C and HIV/AIDS. The government would ultimately indemnify CSL against legal action arising from the contaminated blood.
But the project to build the new plant in Broadmeadows was not going to plan. Running over time and over budget, McNamee pitched that CSL buy it off the government. In exchange the government, which had been paying below the global market rate, agreed to pay more for CSL’s plasma. The company would be freed of its government shackles.
McNamee wanted it sold all at once, not in tranches like Qantas – “the dead hand of government” wasn’t to own any portion of CSL.
In 1994, the agreement netted CSL about $70 million extra in plasma sales annually, while the government was given CSL shares to the value of $150 million, which it sold as part of the float.
The clincher that cemented the company’s listing, however, was when McNamee said he wanted to buy a US asset, JRH Biosciences, and questioned if the government really wanted to take on that risk.
In 1994, the final decision was taken. Government-owned CSL would list on the ASX. That there was so little controversy inside or outside the government reflected how poorly CSL was regarded at home.
“It turned out to be a brilliant decision, but you’re looking at that with hindsight,” says Howe, whose Labor left-wing colleagues were not naturally inclined towards privatisation. “I don’t think people in the government recognised the enormous potential that biotechnology would have to Australia, and CSL was front and centre to that movement.”
To secure CSL’s future as a public company, McNamee agreed to a company constitution that still requires it to remain incorporated in Australia, that its head office remain in Australia, that two-thirds of its directors are Australian, and that it is not allowed to sell or mortgage its Broadmeadows facility.
‘Serious whispering campaign against the float’
Brian McNamee at CSL’s listing in 1994 and in the CSL office in Melbourne this year. Eamon Gallagher
McIntosh Securities scored the mandate as the lead manager on the float, which was priced at $2.30, giving it a market capitalisation of $299 million. At the time, CSL was generating $193 million in revenue annually.
Due to a share split in 2007, former McIntosh Securities head of investment banking John Magowan says its listing price in today’s terms would have been about 77¢.
Magowan, who worked on the float and was responsible for setting the pricing, says it was well-supported by foreign institutional investors and retail investors.
US and European funds were more optimistic about CSL’s growth potential than local investors. Australian institutions believed CSL’s move into the APAC blood products market was high risk. They also struggled with the lack of comparable stocks on the ASX.
But there was more to the hesitancy of local funds than meets the eye, former Financial Review Chanticleer columnist Ivor Ries says.
“In my time in journalism, it was the first time I had encountered a serious whispering campaign against a float,” he says.
“[At the time] floats were pretty much an ignored thing. [But] there were obviously people from the left side of politics that didn’t want companies to be privatised, but there were also other people who seemed to want to suggest there could be something wrong with it.
“I would get anonymous phone calls from people bagging it. It did spook a lot of the domestic institutions, which is why they were pretty small players in the IPO.”
Ries says he never got to the bottom of who was leading the scare campaign, but says the negative messaging centred on the AIDS epidemic, and rumoured workplace discontent.
The fear around the AIDs epidemic, which was still raging in the early 1990s, is something Magowan also recalls. “As I understand it, there was no [investor] meeting where it wasn’t raised,” he says.
“But it was a successful, low-key float. No one realised just what the potential was.
“Can you imagine what the company would have been if it stayed in government ownership? Do you think the government would have let them go to the US and actually pay people for blood? Would it have let them spend $1 billion buying into Zentrallaboratorium (ZLB) and Aventis Behring? No.”
Under the terms of the float set by the government, foreign investors were only entitled to 26 million shares, but bid for four times this amount.
The largest identifiable shareholder in the float was USAA Investment Management, with 1.36 per cent. Other offshore funds to buy in included Kemper Investment, JPMorgan and Bayerische Landesbank Munich.
The globalisation of CSL
CSL chairman Brian McNamee in Melbourne in March. McNamee took the reins at CSL as a 33-year-old and is now recognised as one of the most successful business leaders in Australian history. Eamon Gallagher
When CSL went public, the company employed about 1300 people and was processing about 185,000 litres of plasma from the Australian market and 54,000 litres from foreign countries annually. In the 1994 financial year, it banked $18.1 million in net profit after tax.
A believer in “”scale efficiency, scale innovation and globalisation”, McNamee assessed what areas of the business were best suited for global growth.
He looked at antivenoms, but they were too Australia-specific. He looked at influenza vaccines, but some of CSL’s board members detested the flu vaccines business and wanted to sell it off.
Ultimately, McNamee doubled down on plasma – a complicated, unloved area of healthcare. Plasma is the yellowy part of blood once it’s separated into its component parts – red blood cells, plasma, white blood cells and platelets – in a process known as fractionation.
“The swing to seeing blood products, as it was called then, as the driver of the company’s internationalisation was a big [turning point],” Naylor says.
“Traditionally, it had been seen as something not very commercially exciting, it was just something you had to do as part of the national interest.
“The thinking had been that the avenues for internationalisation were veterinary, fetal calf serum, pharmaceutical products and potentially even influenza – that was where the development was happening, and the acquisitions were being done – but there was certainly a shift a little after the float.”
Naylor, a “freaking genius” according to McNamee, worked with McNamee to do the first major strategic review of the company in the mid-1990s. This centred on how to use blood products to globalise the business. They realised that in its domestically based, sub-scale form, it was doomed and would eventually be bought out by one of the bigger global players.
“I think that’s what galvanised the internationalisation of the company,” Naylor says.
At the time, the plasma industry was highly fragmented globally, and that represented an opportunity.
McNamee faced a simple but stark choice: buy, or be bought. He decided on the former, and that the best bet was to go all in on blood to try to become a global player in plasma fractionation and immunoglobulin-based products.
‘A nasty competitive bidding process’
Inside CSL’s Bern facilities as they are today. Peter Braig
The plan might have been simple, but McNamee and his CSL team still had to find the right businesses to buy and then to close the deals – no mean feat for a business that was still relatively small and with a questionable reputation on the global stage. But by the end of the century, CSL was ready to move.
The first deal came in 2000, when CSL acquired ZLB for 860 million Swiss francs, beating out a much larger rival bidder in Novartis.
The Swiss business was twice its size, and gave CSL a presence in the US plasma products market. It made CSL the third-largest industry player behind Baxter and Aventis Behring.
“It was a nasty competitive bidding process,” McNamee recalls.
“We sent multiple teams over there, got to know the ZLB people very well … Our pitch was we’ll give you a future, not just a past, and we’ll invest. [It] was a bold move to buy a business that was about five times bigger than us in plasma.
“It was the start of the journey. We had already sold off JRH and animal health, so we were narrowing our focus as a company. I kept saying we couldn’t be a diversified conglomerate, we had to focus.”
Naylor was charged with integrating ZLB – something he says was ironic, given ZLB was “vastly bigger, culturally sophisticated and technically modern” compared to CSL.
“It forced the company to grow up at a dramatic pace,” he says. In hindsight, Naylor says it proved pivotal. “I think the turning point for the company was the ZLB acquisition in 2000.”
But that wasn’t immediately apparent. Shortly after the deal, CSL faced one of the biggest challenges in its corporate history – a plasma glut.
In the aftermath of September 11, blood donations had soared and the cost of intravenous immunoglobulin (IVIG) fell between 10 per cent to 15 per cent between 2002 and 2003. CSL’s share price tanked and its profits flat lined.
The ZLB business took a substantial hit, with its Bern facility operating a low-margin, high-volume model. It made IVIG and albumin, but not the higher yield liquid form of IVIG.
“It made life complicated, to say the least. Our share price dropped, pre-split, from $52 to $11,” McNamee says.
“The industry was just shredding dollar bills. We were struggling ourselves, but we were just coping, whereas many others were losing.
“We really believed it was a temporary thing and the fundamental economics of plasma fractionation was a potent story, but it reminded you that you needed to have the highest yielding, the best product portfolio, best labels … All the things you had to do properly, and we doubled down on all of those things at that time.”
The plasma industry tailspin in the early 2000s and the resulting share price pain triggered a wave of criticism towards both McNamee and CSL. The CEO had a clear strategy, but a growing number of investors and commentators weren’t buying it. But for all the challenges the plasma price crash presented, it also delivered an opportunity.
The ‘bet the farm’ moment
When Gordon Naylor joined CSL in 1987, he thought he’d made a huge mistake. Simon Schluter
McNamee knew he had to make another big move to shore up the company’s future and CSL began circling the therapeutic protein unit of Aventis, Aventis Behring – the second-largest player in the industry with a 15 per cent market share.
The Behring unit was an unloved part of the Aventis family because it was losing a lot of money and was in a world of regulatory pain. As such, Naylor says the $US925 million deal was a “”bet the farm” moment for CSL.
One commentator told the Financial Review at the time that: “It could be the proudest moment for the Australian pharmaceutical industry. It could also be its darkest hour.”
While the deal was announced to the ASX in December 2003, McNamee had been dancing with Aventis management behind the scenes for months, and every time he met the company, he lowered his price.
“We understood that if we could do the Aventis Behring deal, it could be transformative on the assumption that we get the cost structure under control, completely change the supply chain and bring our high-yielding liquid IG product to the Aventis product, because they had a low-yielding crummy product.
“[But] they didn’t seem to understand… if you’re not making money on IG, you’re not making money. I explained that to the CFO of Aventis at the time. [I said] ‘I don’t care how long this deal takes us to do, it’s only a question of price and how much pain you’re willing to take because your process, you can’t fix’.”
The financial position of Aventis Behring was so poor that by the time the deal eventually closed in 2004, CSL snapped it up for less than the book value of its inventory.
“They take a very long view of strategic development,” Fidelity International analyst and portfolio manager Zara Lyons says. Fidelity has been invested in CSL since the fund was established in Australia in 2003.
“Their assets traditionally work in segments of healthcare where other companies haven’t been able to make it work.”
With Behring, CSL extended its plasma processing capabilities dramatically, acquiring its 2 million-litre Kankakee facility in Illinois, and helping grow its number of collection centres from 47 to 73.
It also gave CSL a more diversified portfolio, with a range of leading coagulation products and expertise in haemophilia, and set it up to achieve a higher profit per litre of plasma processed, giving it the scale to improve production efficiencies and boost yield.
The Behring deal, Levy says, is what truly internationalised CSL.
“When we bought Behring, we had a presence in Australia, New Zealand, Switzerland. [In] a couple of European countries we had distribution businesses and just a sales office in North America. Aventis Behring added central and South America, Japan, China and a whole raft of European countries,” he says.
“It was the most challenging [acquisition] just because of the breadth of it.”
The acquisition would introduce McNamee’s eventual successor, Paul Perreault, to CSL.
Perreault, who headed Behring’s hospital products and then its plasma operations, says that in his last year before CSL bought the business he was paid a bonus not to lose more than $100 million.
“We were the pimple on the clay of the dog within Aventis, we were a rounding error… and that was part of the problem,” he says.
“We had tonnes of inventory and product, we weren’t able to sell it, prices had tanked … and it was hard to get back in [to the market after regulators had blocked the business from selling its plasma products in the US for a few years after a health and safety issue].
“Aventis didn’t really understand our economics because for us 60 per cent to 65 per cent of our costs were in raw material manufacturing … that’s why big pharma got out of this business. It’s hard, it’s complex, there are 1000 moving pieces and levers you push and pull every day to make it work.”
The Behring deal, however, would prove a masterstroke.
When McNamee handed over the reins to Perreault in 2013, he had achieved a compound annual profit growth rate of 30 per cent, taking the business from $18.1 million in net profit after tax in the year it listed to $US1.2 billion.
CSL had also launched its two key immunoglobulin products – Privigen and Hizentra – which are still the big earners for the company today.
CSL had also played a major part in bringing to market the breakthrough vaccine for cervical cancer, Gardasil, which scored US Food and Drug Administration approval in 2006.
‘Baxter became the enemies for life’
Paul Perreault pictured in 2012 when he was announced as Brian McNamee’s successor. Josh Robenstone
While McNamee’s ambition and commercial prowess was recognised by colleagues and investors alike, only those within the business knew the true extent of his fierce competitive streak.
Since his first interaction (or lack thereof) with American healthcare giant Baxter, McNamee’s drive was fuelled by a desire to be better than the company.
This rivalry was cemented in the mid-2000s when Baxter succeeded in getting the Australian government to review CSL’s position as the only company licensed to fractionate plasma, as part of the conditions for the Australia-US Free Trade Agreement.
The move resulted in an inquiry led by former diplomat and senior public servant Philip Flood that looked at the possibility of opening up the market to American competitors. McNamee describes the inquiry as an “incredible dagger in the heart of the company”.
That the government was prepared to entertain the idea of an American rival threatening the business of a company that was a home-grown Australian success story did not sit well with him. But ultimately CSL’s status as the sole fractionator was re-endorsed in 2007.
“That was it for us. Baxter became the enemies for life,” McNamee says. “It became the rallying call of our entire staff. Everything we did was to beat them.
“Not only did we beat them, I think we humiliated them. They created us – they probably don’t realise that.”
On Tuesday: Inside CSL’s plasma powerhouse.
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