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A Journey Through America's Healthcare and Socio-Economic Landscape

Sam Byrnes
Sam Byrnes

Our recent excursion across the United States offered us a unique perspective on the intricate dynamics of the healthcare industry and the socio-economic fabric of the country. Spanning five cities in as many days, our journey was filled with revelations and realisations gained from the corporate discussions as well as the buzzing streets of Washington.

Insights into CSL: Analysing Industry Challenges

A core focus of the visit was centred around understanding the challenges faced by CSL, a major player in the US healthcare industry. Over the past six months there have been three key issues that have been holding the stock back. These are the headwinds to the post-COVID margin recovery, increased competition from the novel FcRn drugs, and more recently the potential impact from the weight loss drugs, GLP-1 agonists, on the company's kidney franchise.

Margin Dynamics

Observations from the PPTA industry conference in Washington, indicate that donor fees are declining. Donor fees reached a peak of close to $100 a litre and are now down into the low $70's. In addition, there remains a general optimism from industry players that fees will likely continue to trend lower. As a main input cost for CSL, this bodes well for a recovery in margins over the next three years. The number of collection centre openings has also declined. This, coupled with increased yield initiatives are likely to further enhance overall manufacturer efficiency. Our conversations increased our conviction that while the margin recovery has been slow to date, CSL has a winning combination of higher margin growth and lower capital expenditure over the next few years that should materially improve the company's return on invested capital. 

FcRn's Market Impact

The extremely successful launch of Vyvgart by competitor ArgenX, for treating Myasthenia Gravis, has weighed on CSL as investors have contemplated what that means should it gain a label in CIDP - a much larger market for CSL.  However, discussions with infusion clinics revealed uncertainties regarding Vyvgart's value proposition. Its frequent dosing, higher than recommended, undermines its convenience and raises cost concerns, questioning its long-term sustainability. Frequent advertisements on TV, for a rare disease that affects 40 in 100k people, highlights just how profitable this drug is at a cost that can be multiples of the CSL's IVIG product.

GLP-1's Overestimated Effect

The rise of GLP1's has also captured the market's attention on CSL, with seemingly no regard to how little the company is exposed through its kidney disease franchise. We dropped in to Houston to have breakfast with a Nephrologist that owns a number of dialysis centres. His comments were particularly striking. When questioned on the potential for these wonder drugs, he noted that most of these people aren't on dialysis because their existing treatment failed. Effective treatments exist that can prevent their complications. They end up on dialysis, at least in part, because they had not engaged with the health system, were unwilling, or didn't adhere to the treatment they were prescribed. Even for the under-insured the basic treatments are available, they just don't use them. This leaves us more convinced that GLP1's are unlikely to be the panacea that the markets are currently predicting. Interestingly, the one person we met in the US that had managed to lose over a third of his body weight in under 12 months, had done so the old fashioned way. 

The Dichotomy of Washington

Another observation that struck us was the stark contrast between the level of government spending and the healthcare and broader socio-economic outcomes in the country.

When we went to dinner in Washington we were struck by how the venue was buzzing on a cold Wednesday night. When enquiring as to what was going on, we were told the place was filled with congressional staff celebrating after the US House passed a spending bill to avert a government shutdown earlier that day. The elation to rising government debt was in stark contrast to other observations on our journey. Whether it was the frequent conversations regarding the rising homelessness and increased crime rates, or the visit to a Californian community hospital that was clearly underfunded and budget constrained despite residing in a country that spends 18% of GDP on healthcare, we can't help but wonder what is broken when a drug company can spend millions advertising a very niche product, while a community hospital can't find the budget for a few ventilators.

Navigating the Intricacies of U.S. Healthcare and Economy: A Revealing Expedition

This trip turned out to be more than a mere visit; it was an educational journey through the healthcare and socio-economic realities of the United States. The insights gathered from our company focused meetings, the socio-economic issues in Washington, and the state of healthcare across different regions deepened our comprehension of the complexities and contrasts that define America today. Paradoxically, we left the country more optimistic as to the future of the healthcare companies we are invested in, yet with a more cautious outlook on the broader state of the U.S. economy.

The article has been prepared by ECP Asset Management Pty Ltd (ECP). ECP is a funds management firm based in Sydney, Australia. For further information, visit www.ecpam.comThis material has been prepared for informational purposes only and is not intended to provide and should not be relied on for financial advice. ECP and the author own shares in CSL Limited. ABN 26 158 827 582, AFSL 421704, CAR 44198.

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