CSL

Noting the CSL R&D day.

There’s lots of good charts. Below, you can see Hizentra, the subcutaneous IVIG product, continuing to dominate the competitive landscape, which it has done since day 1.

You can see they are very good at coming up with novel therapeutic interventions that address unmet clinical needs.

But what is the point of browsing all that stuff, from a stock picking perspective (as in we think its worthwhile, but what’s the mechanism to a good investment outcome at work here?).

Some of it is handwaving. Quality companies tend to be systematically under-priced, for a range of semi-plausible behavioural explanations, and owning a basket of companies that score well on such a quant model has been shown the generate alpha over long periods of time.

The above graphs suggest quality, as do the below regression methodology.

The handwaving can get fractionally more explicit, in that a strong successful product pipeline can translate into a true earnings trajectory, that is higher than the market expects, and the strong resultant franchise value (e.g. these guys will keep innovating at a higher rate than the market expects) can translate into a true earnings multiple that is higher than the market expected.

So, what is it that one is doing here?

To some extent, it’s due diligence. “I think it’s a quality stock, and all those graphs about success sure seem indicative that they know what they are doing/have good products/can compete effectively”. That big R&D budget as a % of sales is also the sort of thing that can keep a competitive lead intact (indeed, R&D declining is something to watch for).

Sometimes it is validation of the obvious. A company without an R&D day would be a red flag, but if that sounds silly to you than think of the many mining company production presentations that have hit the ASX over time, which have revolved around an unbuilt mine with not a digger in sight a 1000 clicks from any rail to port infrastructure.

So, coming full circle, what’s the point of this note? Well, it’s about trying to work out “what’s the mechanism”. That’s the funds management side of things. The advice side is even more direct, but still often omitted. It’s the evidentiary documentation. Someone, somewhere, has got to actually look at it (this detail, here, the R&D day), and say something that’s both forward looking and objectively aligned. And that’s not easy.

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