It’s In our Blood

Stocks with cult-like followings are often significantly influenced by the prevailing emotion of the day.

When this overarching sentiment is one of amplified exuberance, many investors are quick to discount near-term risks whilst underwriting perpetual above-market growth rates.

If these moments of peak psychological dislocation are combined with unexpected negative business or industry momentum, the impact on sentiment can be profound and lasting.

Every stumble is magnified and every downgrade extrapolated as the market prices the business as though its best days are permanently behind it.

As contrarian value investors, we are paid to identify when the market’s psychology is wrong in either direction and to have the intestinal fortitude “to be fearful when others are greedy, and greedy when others are fearful” as Buffett so aptly put it.

Off the back of a perfect concoction of bad news in the form of downgrades, industry headwinds, capital allocation woes and abrupt management changes, we believe CSL offers investors a highly asymmetric opportunity for precisely this psychological arbitrage.

A fall from grace

For decades, CSL was arguably the cleanest compounding story on the ASX.

A quality biopharmaceutical franchise and owner of the most efficient and highly integrated plasma collection network in the world, CSL was a reliable engine of double-digit earnings growth that mums and dads, superfunds, and global generalists alike were happy to pay 30-40x earnings to own.

The business has three main divisions.

CSL Behring is the crown jewel and runs the world’s largest integrated plasma operation. Human plasma is collected and fractionated into life-saving proteins such as immunoglobulin (Ig) and albumin for immunocompromised patients around the world. These proteins have no patent cliffs or biosimilar pathways and are supplied to the world through a five-firm global oligopoly. Behring comprises 69% of CSL’s Operating Income.

CSL Seqirus is the world’s second largest flu vaccine manufacturer, comprising 15% of group EBIT.

CSL Vifor was acquired in 2022 for ~US$11.7B at 18x trailing EBITDA right at the top of its industry cycle. The segment markets intravenous iron and a nephrology portfolio. To put it kindly, this acquisition has proved nothing short of a capital allocation disaster. The segment comprises 16% of CSL’s EBIT.

For years, the dominance and consistent double-digit growth profile of Behring commanded a near-permanent premium multiple for CSL shares.

However, in August 2025, the wheels started rapidly falling off.

The perfect storm

Since August 2025, CSL have downgraded earnings twice.

The board abruptly stood down its CEO on the eve of its first half earnings call, with no permanent successor announced.

The company, and industry at large, was also hit with a permanent U.S. Medicare restructuring via the Inflation Reduction Act’s Part D redesign. This mechanically reset U.S. Medicare-funded immunoglobulin pricing 20% lower under a new manufacturer discounting regime causing a US$200M headwind for CSL’s FY26 revenues.

Albumin also experienced severe pressure across the industry as Chinese government volume-based centralised procurement initiatives structurally weakened the per-unit economics of what was previously a higher margin franchise.

 Moreover, the ghosts of CSL’s capital allocation past continued to haunt them through FY26, having now impaired >40% of its only recently acquired Vifor business – arguably one of the worst acquisitions in Australian corporate history.

This headache arrived at the same time the industry faced unprecedented new Ig releases throughout 2024 and 2025, with aggressive 15-20% Average Selling Price discounting from CSL’s competitors. Increasingly distracted by the challenges of Vifor’s integration, CSL dropped the ball on protecting its market share as competitors began eating into the company’s lunch.

Moreover, it was discovered that mid-channel distributors were quietly channel stuffing inventory over the past 1-2 years. CSL therefore took another US$300M upfront hit to projected revenues to ensure a normalized selling cadence reset.

Lastly, Behring’s growth has always been powered by an R&D flywheel – not the conventional pharma kind that scrambles to replace molecules falling off patent – but instead the continual opening of new indications for its patent-immune core alongside a steady cadence of premium specialty launches. Distracted by Vifor, CSL let this flywheel stall as late-stage pipeline disappointments and lost innovation momentum allowed competitors to close the gap.

This resulted in a previously entrenched sense of euphoria associated with CSL shares rapidly turning to fear. The stock sold off from its 52-week high of ~$276 to $98 today, a jaw-dropping 64% drawdown for a stock once widely viewed as infallible.

The question for our global fund was simple: Do CSL’s troubles represent permanent structural impairment, as the daily headlines suggest? Or merely a cyclical downturn mispriced as permanent structural erosion, offering our global fund a rare chance to buy a high-quality, moat-entrenched business at fire-sale prices?

We believe CSL at today’s price represents the latter.

CSL’s Structural Moat

The global plasma collection and fractionation industry is comprised of a five-firm oligopoly and characterized by significant barriers to entry.

CSL, Grifols, Takeda, Kedrion and Octapharma collectively control 80% of global plasma fractionation (Source: GM Insights) and 60-70% of global plasma collection, with 70% of global plasma collected in the U.S. There has not been a single meaningful new entrant in the industry for over 25 years.

CSL remains the global market leader in fractionation with a ~28% share. (Source GM Insights)

The cost to replicate the scale of the Big 5’s asset base, vertical integration and intellectual property provides structural reinforcement for this oligopoly.

It would require many billions of dollars just to build, qualify and get global regulatory approval for the vast collection centres and specialized fractionation sites that would match CSL’s scale. And this says nothing for matching CSL’s plasma yield in an economically efficient manner – a capacity backstopped by highly valuable intellectual property developed over many decades.

CSL extracts the highest yield of finished therapy per litre of plasma collected, grounded in its iNomi yield programme and Rika collection platform. It also does so at the lowest cost per litre, evidenced by Behring gross margins that are 10-12 percentage points higher than that of its nearest competitor Grifols.

Both advantages stem from CSL’s full vertical integration and its proprietary collection and fractionation technology.

Moreover, CSL’s Hizentra commands >50% (Source: Market Access) market share in the high-growth subcutaneous Ig category.

CSL is modestly levered at 1.95x Net Debt/EBITDA and have acknowledged their historic missteps whilst indicating a clear refocus towards reinvigorating the Behring R&D flywheel under caretaker CEO Gordon Naylor.

As such, despite recent headwinds, it is unquestionable that CSL remain the clear market leaders in Global Plasma.

Our analysis of annual plasma collection versus demand suggests a healthy balance of plasma storage in the market.

Long-term end-market demand is characterized by steady 6–8% annual growth – structurally underpinned by an ageing population, expanding label indications, rising diagnosis rates and steady geographic penetration.

Cyclical or Structural headwinds?

Grifols’ Ig segment has seen mid-teens annual percentage growth in both 2024 and 2025 due to recent aggressive Average Selling Price (ASP) discounting of its newly released Ig products. This growth is far ahead of end market demand of 6-8% annually and indicates clear market share gains taken from CSL.

However, we have good reason to believe discounting is irrational and unsustainable, thus needing to subside within the next 12 months.

Our thesis is backstopped by Grifols’ recent Capital Markets Day, where an explicit guidance of moderated U.S. Ig growth in line with the broader market of 6-8% from FY26 onwards was issued.

Additionally, Grifols openly signalled its shift in focus to expansion of group EBITDA margins from 24.8% in FY25 to 29–30% by FY29 as it gears up for a potential IPO of its U.S. plasma business. Given Grifols’ plasma segment comprises >85% of group earnings, this margin expansion cannot be achieved as the company continues to torch ASP with double-digit discounts.

As CSL’s main competitor has now signalled the conclusion of its irrational and unsustainable discounting in the near-term, the picture becomes clear that the recent headwinds plaguing CSL are cyclical rather than structural.

Despite being burdened by the perfect storm of transitory issues likely to subside within the next 12 months, CSL still represents a high-moat franchise in an oligopoly industry with structural demand tailwinds.

Valuation – Paying trough multiples for a structural compounder

Prior to recent headwinds, CSL historically traded at 30-40x earnings. We believe this is far too expensive.

However, at 10.9x FY26 earnings, the market is pricing CSL as though its structurally moat-entrenched, oligopoly protected, demand-growing crown jewel in Behring is permanently impaired.

We conservatively assume no recovery in CSL’s Seqirus division, another segment impacted by a cyclical downturn given U.S. flu vaccine policy uncertainty associated with RFK Jr’s appointment as US Health Secretary. We also assume Vifor remains in long-term structural decline.

Despite these assumptions, we believe the fear surrounding CSL’s market position in plasma will subside as its Ig franchise returns to mid-single-digit annual growth and the perfect storm of cyclical headwinds subsides.

Despite the visibility into industry normalization, CSL’s stock price remains dominated by fears surrounding short-term transitory noise.

At just 15x FY29 earnings – a multiple we deem as highly conservative given CSL’s dominant position in this industry oligopoly – the stock represents a highly attractive 61% upside from its last traded price of $98.

We believe there is a large margin of safety baked into the prevailing share price and that downside risk is largely capped over a medium-term investment horizon given the recent mass panic selling combined with clear visibility into industry normalization.

Only one year ago, CSL was priced for perfection. Today, it is priced for permanent decline. Our thesis is that both assumptions are untrue.

We are confident the market has mistaken a cyclical fever for a terminal diagnosis. In that misdiagnosis lies the psychological arbitrage opportunity we are constantly on the hunt for: buying a dominant, moat-entrenched franchise at all-time-low earnings multiples while the crowd focusses on short-term noise and sells in fear.