Company Reports

Grifols reported 4.1% revenue growth (5.5% at constant currencies) in the first quarter of 2024, as solid 9.4% constant currency growth in the biopharma division was countered by declines in diagnostics and biosupplies. The firm’s adjusted EBITDA margin of 21.6% came in well below the firm’s full-year guidance of 25%-26%, and Grifols’ free cash flow shrank further into the red, from negative EUR 144 million to negative EUR 253 million, mainly due to changes in working capital. We see some encouraging signs that the firm will be able to meet its 2024 guidance and return to positive free cash flows beginning in the second quarter. We’re maintaining our EUR 10.90 ($11.80) fair value estimate, which incorporates revenue growth (6% as reported) and adjusted EBITDA (24.1%) near the low end of management’s 2024 guidance as well as low- to mid-single-digit revenue growth beyond 2024 as competition in the alpha-1 market and autoimmune-related immunoglobulin indications ramp up. Even with these relatively conservative expectations, shares are trading roughly 40% below our fair value estimate, as we think the market is overly concerned about Grifols’ ability to improve its financial health.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

Grifols reported 2023 revenue growth of 8.7% (10.9% at constant currencies), in line with our expectations, but the firm's profitability was lower than we had anticipated. This was largely due to additional restructuring costs and efforts to improve manufacturing efficiency at Biotest, but also due to rising interest rates on the firm's floating rate debt. We're lowering our fair value estimate to EUR 10.90/$11.80 from EUR 12.20/$13.40 after updating our model for these results as well as the firm's 2024 guidance, which reflects continued strong demand for Grifols' plasma-derived biopharma products, but also potential price concessions and investments in commercial launches and manufacturing. We now model roughly 7% top-line growth in 2024, in line with management's guidance, as well as a relatively steady EBITDA, after factoring in Biotest-related investments and efforts to regain contracts lost during the pandemic. Longer term, we're encouraged by the potential for Biotest's fibrinogen product, which should be filed with regulators by the end of the year and launch in 2026, although competition to the firm's alpha-1 business is looking increasingly likely, with Sanofi's pending acquisition of Inhibrx. Overall, we continue to see Grifols' strong position in the plasma market as warranting a narrow economic moat. The firm's ability to maintain this moat will likely depend on whether its own innovative launches can counter novel, non-plasma-derived product launches from competitors.

Gotham City Research released a report on Jan. 9 accusing Grifols of manipulating its debt ratios with its accounting treatment for noncontrolling interests and related party transactions, lowering reported debt to EBITDA to 6 times, from closer to 10-13 times according to Gotham City. After sorting through the accusations, our initial opinion is that Gotham City’s motives are suspect, as it discloses that it holds a short position in Grifols. Given this position, we believe Gotham is likely concerned that Grifols’ recently announced $1.8 billion sale of a 20% stake in China plasma firm Shanghai RAAS, which is expected to close in the first half of 2024, could significantly improve its financial health. The announcement of the sale had led to significant share appreciation in late December. In addition, Gotham City claims that Grifols did not disclose a $95 million loan in 2018 to Scranton Enterprises, a noncontrolling shareholder in Grifols that is associated with the Grifols family, although we clearly see the disclosure in the firm’s 20-F filings, which leads us to question the accuracy of Gotham City’s report. Grifols’ financial statements have been audited by KPMG for the past several years, and we therefore continue to model Grifols based on its reported financials, and we’re not making any changes to our fair value estimate. We think the firm’s position in the global plasma therapeutic market continues to warrant a narrow moat. That said, we acknowledge that Grifols’ business has grown more complex over the past several years, and the firm has understated its debt at least once; Grifols reclassified the roughly EUR 800 million investment from Singapore sovereign wealth fund GIC as a financial liability rather than as an equity investment following an audit by KPMG in 2022. Given the complexity around the firm’s accounting, we’re raising our Morningstar Uncertainty Rating from High to Very High.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

We're raising our fair value estimate for Class B (nonvoting) shares of narrow-moat Grifols to EUR 12.20/$13.40 from EUR 11.10/$12.20 after accounting for the planned sale of a 20% stake in China-based plasma firm Shanghai RAAS. The $1.8 billion in proceeds from the deal, which is expected to close in the first half of 2024, should help Grifols continue to pay down debt and improve its financial health. We look favorably on the deal, which allows Grifols to maintain its collaboration with Shanghai RAAS, giving it access to the world’s largest market for albumin through at least 2034. Grifols is also maintaining a more than 6% stake in Shanghai RAAS, giving it additional exposure to continued expected growth of the China plasma therapeutics market. The proceeds from the sale should provide a much-needed cash infusion in 2024, as Grifols has been balancing a heavy debt load during a time of lower profitability, as the firm recovers from lower plasma supply and less efficient operations during the pandemic.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

Grifols saw slightly lower third-quarter sales growth than we had modeled, but cost savings measures are also working faster than we had anticipated, so we're maintaining our $12.20/EUR 11.10 fair value estimates for class B non-voting shares. Grifols’ top line grew 9% at constant currencies in the quarter, driven by 14% growth in Biopharma. Management called out immunoglobulin (15% constant currency growth so far this year) and albumin (18% year-to-date growth) franchises as top performers in Biopharma, as its newer subcutaneous product Xembify continues to gain share in the immunoglobulin market and albumin benefits from higher demand and pricing in China. Management reaffirmed its guidance for 10%-12% constant currency growth for the full year, with adjusted EBITDA poised to hit the high end of prior guidance, at EUR 1.45 billion. Emerging competition in autoimmune diseases from firms like Argenx and UCB has kept our moat rating for Grifols at narrow, although we still think the immunodeficiency market (roughly half of Grifols’ total immunoglobulin market) and other plasma-derived proteins like albumin have better long-term prospects. That said, the alpha-1 market appears to have flattened, and new competition is approaching.

We’re maintaining our Grifols class B fair value estimates at $12.20/EUR 11.10 following second-quarter results that reflect solid demand for the firm’s plasma products, particularly the most profitable immunoglobulin products. Grifols saw 8.8% constant currency sales growth in the second quarter, with 10% growth in the biopharma business, which encompasses the firm’s plasma-derived protein therapies. Within biopharma, Grifols is seeing double-digit growth in its immunoglobulin business, particularly for its new, more profitable subcutaneous option Xembify, and we think the firm is smart to focus on further penetration of the immunodeficiency markets, where competition remains light. Firms like Argenx and UCB are already gaining approval in autoimmune diseases where immunoglobulin has been historically used, and while they are still competing in a relatively small segment of Grifols’ market, we expect this competition could gradually spread across roughly 40% of Grifols’ market if approvals extend from myasthenia gravis into ITP and CIDP (Argenx’s Vyvgart could launch in both indications by 2025). The prospects for this emerging competition have kept our moat rating for Grifols at narrow, although we still think the immunodeficiency market (roughly half of Grifols’ total immunoglobulin market) and other plasma-derived proteins like albumin and alpha-1 have better long-term prospects for Grifols to maintain its competitive advantages. That said, we think Grifols needs to continue to make progress with innovation in its pipeline, as less-innovative formulation changes still dominate the late-stage pipeline, with more novel drug candidates mostly in earlier stages of development. We’re closely watching for progress with Biotest’s pipeline, which should result in Fibrinogen approval as well as potential data for Cytotect and Trimodulin in 2024.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

We’re slightly lowering our Grifols fair value estimates of EUR 11.40/$12.20 for class B (nonvoting) shares to EUR 11.10/$12.20 following first-quarter results that were roughly in line with our estimates, factoring in slightly higher operating expenses as well as exchange rate fluctuations. Grifols reported solid top-line growth in the first quarter, with 18.4% constant currency growth including the Biotest acquisition (completed in the second quarter of 2022) and 9.1% growth excluding Biotest. Focusing on the biopharma division, Grifols saw 21.1% growth (9.6% excluding Biotest), as the firm continues to see strong demand and mid-single-digit price increases for its most profitable plasma-derived products like immunoglobulins and alpha-1. Grifols appears to be strategically focusing on maximizing growth with subcu product Xembify and in immunodeficiency, an area of the immunoglobulin market that look less vulnerable to novel competitors and is poised to see high-single-digit market growth. We model mid-single-digit revenue growth for Grifols in the coming years, as stronger growth for new specialty drugs and immunoglobulin in immunodeficiency is likely to be countered by slower growth in the albumin market and non-plasma competition in the autoimmune market for immunoglobulins as well as the alpha-1 market. Grifols also announced this week that board chairman Thomas Glanzmann has been placed in the role of CEO. While Glanzmann just entered the board chairman role in February, he had been vice chairman since 2017 and on the board for 17 years, with a long history in the plasma industry. We think this management realignment will help keep the firm on a stable path toward reducing leverage and maximizing the opportunity for plasma sales over the long term, and we continue to see Grifols as holding a narrow moat. Also, we’re raising our Uncertainty Rating for Grifols to High from Medium, due to variable cost concerns and new potential competition over the midterm.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

We’re lowering our fair value estimate for Grifols B shares slightly to EUR 11.40 and maintaining our $12.20 ADR fair value estimate as we’ve adjusted for foreign exchange fluctuations as well as management’s forecast for 2023.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

We've lowered our Grifols fair value estimate for the firm's non-voting shares to EUR 12.10/$12.20 from EUR 15.40/$16.20 following third-quarter results that were solid but led us to forecast a longer timeline to margin recovery than we had previously built into our model. Grifols reported third-quarter revenue growth of 37%, benefiting from both the incorporation of the recent Biotest acquisition as well as foreign exchange tailwinds. On a constant currency basis and excluding Biotest, revenue grew 13.7%, as 21% growth in the biopharma arm (80% of sales) was partly countered by loss of COVID-19 and Zika testing sales in the diagnostics arm. Plasma collections are recovering from lower levels during the pandemic—up 25% in the first 42 weeks of the year—and pricing power remains strong. In addition, the firm's 20.9% EBITDA margin (20.6% excluding Biotest) in the quarter puts Grifols on track to see similar margins for the full year, as guided by management. However, these margins are significantly below the 25% level seen in the first half of 2021, largely due to a lower gross margin.

Grifols' financial results in the first half of 2022 were in line with our expectations, with strong underlying revenue growth despite gross margins slightly below our forecast, and we are maintaining our fair value estimates of $16.20/EUR 15.40 for class B (nonvoting) shares. Revenue grew 3.4% at constant currencies, with an exchange rate benefit boosting sales to EUR 2.8 billion (10.8% growth).

We're maintaining our EUR 15.40 fair value estimate for Grifols' nonvoting shares following a solid first-quarter review from the company and lowering our fair value estimate for the ADRs to $16.20 from $17.10 as a result of foreign exchange fluctuations. Grifols is seeing strong growth in plasma collections, 16% year to date, driven by existing Grifols centers returning to prepandemic collection levels as well as the addition of newly acquired centers. The EUR 1.1 billion acquisition of Biotest, completed in April, will increase plasma availability, particularly outside the United States. While sales will lag collections recovery, Grifols is still seeing low-single-digit constant-currency revenue growth so far this year, with mid- to high-single-digit Bioscience growth benefiting from volume, price, and product mix (more sales of the firm's new subcutaneous immunoglobulin product). Even though donor compensation costs and inflationary pressures are still headwinds for Grifols, the firm is seeing margins improve, with a roughly 20% EBITDA margin year to date, up substantially from the 13.6% reported in the second half of 2021. Continued recovery from pandemic-related headwinds could help Grifols stay on track with reducing its debt load, and with no near-term dividends expected and plans for lower capital expenditures, we think the firm can reach its goal of net debt/EBITDA of less than 3.5 by 2024. As the firm emerges from the pandemic with product demand and pricing intact, we think its long-term position in the plasma protein oligopoly remains strong, warranting a narrow moat rating.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

We're slightly lowering our fair value estimate for Grifols' non-voting shares from EUR 16.20/$18.30 to EUR 15.40/$17.10 after adjusting for foreign exchange fluctuations as well as cost of debt ahead of the Biotest acquisition, which remains poised to close in the first half of 2022. Plasma collection was under pressure in the first half of 2021, partly due to COVID-19-related U.S. fiscal stimulus programs that reduced the number of paid plasma donations, thereby putting pressure on Grifols' results in the second half of the year. In addition, margins were affected by higher donor payments and fixed costs spread across a lower volume of collected plasma. However, Grifols' efforts to acquire and expand plasma collection centers in the U.S. and Europe have allowed it to increase plasma collection by 4% over the last three quarters, and COVID-19-related headwinds appear to be abating. We continue to think Grifols holds a steady position in the global plasma-derived protein oligopoly, warranting a narrow moat rating.