Part I [Key Information](index=8&type=section&id=Item%203.%20KEY%20INFORMATION) This section summarizes Grifols' five-year financial data under IFRS and details key financial, operational, and industry risk factors Consolidated Statement of Profit and Loss Data (2014-2018) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | | (in thousands of euros) | | | | | | **Net revenue** | 4,486,724 | 4,318,073 | 4,049,830 | 3,934,563 | 3,355,384 | | **Gross Profit** | 2,049,560 | 2,152,011 | 1,912,291 | 1,930,998 | 1,699,214 | | **Operating Result** | 994,124 | 1,003,343 | 939,408 | 970,370 | 857,689 | | **Profit before income tax** | 725,842 | 695,722 | 712,752 | 690,250 | 589,680 | | **Profit attributable to the Parent** | 596,642 | 662,700 | 545,456 | 532,145 | 470,253 | | **Basic earnings per ordinary share (€)** | 0.87 | 0.97 | 0.80 | 0.78 | 0.69 | Consolidated Balance Sheet Data (2014-2018) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | | (in thousands of euros) | | | | | | **Total non-current assets** | 8,993,795 | 7,974,948 | 7,007,258 | 6,512,243 | 5,536,627 | | **Total current assets** | 3,483,251 | 2,945,316 | 3,122,514 | 3,089,472 | 2,913,122 | | **Total Assets** | 12,477,046 | 10,920,264 | 10,129,772 | 9,601,715 | 8,449,749 | | **Total Equity** | 4,696,604 | 3,633,965 | 3,727,978 | 3,301,390 | 2,662,883 | | **Total non-current liabilities** | 6,523,121 | 6,308,312 | 5,330,030 | 5,247,319 | 4,777,150 | | **Total current liabilities** | 1,257,321 | 977,987 | 1,071,764 | 1,053,006 | 1,009,716 | | **Total Liabilities** | 7,780,442 | 7,286,299 | 6,401,794 | 6,300,325 | 5,786,866 | [Risk Factors](index=12&type=section&id=D.%20Risk%20Factors) - The company identifies three main categories of risks: those relating to its corporate and financial structure, those inherent to its business operations, and those associated with the broader healthcare industry[42](index=42&type=chunk)[77](index=77&type=chunk)[162](index=162&type=chunk) - Key financial risks include a substantial level of indebtedness (**€6.4 billion** as of Dec 31, 2018), which could affect financial condition and restrict business flexibility; covenants in debt agreements also impose limitations on activities such as incurring additional debt, paying dividends, and making acquisitions[42](index=42&type=chunk)[43](index=43&type=chunk)[50](index=50&type=chunk) - Operational risks are significant, stemming from the complexity of manufacturing biological products, potential for plasma contamination, reliance on a consistent plasma supply, and the need for continuous adherence to cGMP regulations; competition from other major players like Takeda and CSL Behring is also a key risk[77](index=77&type=chunk)[94](index=94&type=chunk)[101](index=101&type=chunk) - Industry-related risks include potential impacts from the US Healthcare Reform Law (Affordable Care Act), government price controls, reimbursement challenges from third-party payors, and stringent anti-fraud and abuse regulations[162](index=162&type=chunk)[169](index=169&type=chunk)[176](index=176&type=chunk) [Information on the Company](index=35&type=section&id=Item%204.%20INFORMATION%20ON%20THE%20COMPANY) This section details Grifols' history, vertically integrated business across five divisions, global operations, R&D, and regulatory frameworks [History and Development of the Company](index=35&type=section&id=A.%20History%20of%20and%20Development%20of%20the%20Company) - Founded in 1940 in Barcelona, Grifols has grown from a domestic Spanish company into a global, vertically integrated producer of plasma derivatives, ranking among the top three in the industry[189](index=189&type=chunk)[190](index=190&type=chunk)[192](index=192&type=chunk) - The company has expanded significantly through strategic acquisitions, including Talecris (2011), Novartis' diagnostic business (2013), and Hologic's NAT Donor Screening Unit (2017)[197](index=197&type=chunk)[200](index=200&type=chunk)[202](index=202&type=chunk) - In March 2019, Grifols entered into an agreement to acquire a **26.2%** stake in Shanghai RAAS, a leader in China's plasma derivatives sector, to serve as the exclusive distributor of Grifols' products in China[195](index=195&type=chunk)[196](index=196&type=chunk) [Business Overview](index=37&type=section&id=B.%20Business%20Overview) - Grifols operates through five divisions: Bioscience (**78.4%** of 2018 revenue), Diagnostic (**15.6%**), Hospital (**2.7%**), Bio Supplies (**3.7%**), and Others (**0.5%**)[207](index=207&type=chunk)[221](index=221&type=chunk) Net Revenue by Division (2016-2018) | Division | 2018 (€ thousands) | 2017 (€ thousands) | 2016 (€ thousands) | | :--- | :--- | :--- | :--- | | **Bioscience** | 3,516,704 | 3,429,785 | 3,195,424 | | **Diagnostic** | 702,265 | 732,369 | 691,701 | | **Hospital** | 119,454 | 105,649 | 102,251 | | **Bio Supplies** | 167,004 | 66,791 | 57,239 | | **Others** | 22,451 | 18,263 | 34,601 | | **Total** | **4,486,724** | **4,318,073** | **4,049,830** | Net Revenue by Region (2016-2018) | Region | 2018 (€ thousands) | 2017 (€ thousands) | 2016 (€ thousands) | | :--- | :--- | :--- | :--- | | **United States and Canada** | 2,974,429 | 2,896,505 | 2,707,579 | | **European Union** | 800,274 | 686,983 | 651,496 | | **Rest of the World** | 712,021 | 734,585 | 690,755 | | **Total** | **4,486,724** | **4,318,073** | **4,049,830** | - The company is vertically integrated, controlling the value chain from plasma collection (**197 centers** in the US) and manufacturing (**14.8 million liters/year** capacity) to marketing and distribution in over 100 countries[192](index=192&type=chunk)[224](index=224&type=chunk)[225](index=225&type=chunk) [Property, Plant and Equipment](index=60&type=section&id=D.%20Property,%20Plant%20and%20Equipment) - Grifols operates major manufacturing facilities in Spain (Parets del Vallès, Murcia) and the United States (Los Angeles, CA; Clayton, NC; Emeryville, CA; San Diego, CA)[350](index=350&type=chunk)[351](index=351&type=chunk) - The company has three plasma fractionation plants in Clayton (NC), Los Angeles (CA), and Parets (Spain), with a combined annual capacity of approximately **14.8 million liters**; all facilities are certified by the FDA and EMA[230](index=230&type=chunk)[352](index=352&type=chunk) - A new global operations center for the Bioscience division was opened in Dublin, Ireland, centralizing logistics, distribution, treasury, and regulatory activities[356](index=356&type=chunk) [Regulatory Matters](index=62&type=section&id=E.%20Regulatory%20Matters) - The company's operations are extensively regulated by government authorities in the U.S. (FDA), the European Union (EMA), and other countries, covering all stages from R&D and manufacturing to marketing and distribution[360](index=360&type=chunk)[392](index=392&type=chunk) - In the U.S., biological products require an approved Biologics License Application (BLA) from the FDA, a process that includes preclinical tests and three phases of clinical trials to establish safety and efficacy[362](index=362&type=chunk)[363](index=363&type=chunk) - In the European Union, medicines are authorized through either a centralized procedure via the EMA or national procedures; Grifols utilizes both, with some products approved centrally and others via mutual-recognition or national processes[393](index=393&type=chunk)[398](index=398&type=chunk)[399](index=399&type=chunk) - Sales are subject to pricing and reimbursement policies, including government programs in the U.S. like Medicaid, Medicare, and the 340B/PHS program, which involve mandatory discounts and rebates[413](index=413&type=chunk)[414](index=414&type=chunk) [Operating and Financial Review and Prospects](index=73&type=section&id=Item%205.%20OPERATING%20AND%20FINANCIAL%20REVIEW%20AND%20PROSPECTS) This section analyzes Grifols' 2016-2018 financial performance, covering revenue, gross margins, liquidity, capital resources, debt, and contractual obligations [Operating Results](index=73&type=section&id=A.%20Operating%20Results) Financial Performance Comparison (2017 vs. 2018) | Metric | 2018 (€ thousands) | 2017 (€ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | **Net revenue** | 4,486,724 | 4,318,073 | 3.9% | | **Gross profit** | 2,049,560 | 2,152,011 | (4.8)% | | **Operating result** | 994,124 | 1,003,343 | (0.9)% | | **Profit before income tax** | 725,842 | 695,722 | 4.3% | | **Consolidated profit for the year** | 594,406 | 661,314 | (10.1)% | - In 2018, net revenue grew **3.9%** (**9.2%** at constant currency) to **€4.5 billion**, driven by strong performance in the Bioscience division, particularly from immunoglobulin, albumin, and alpha-1 antitrypsin sales[461](index=461&type=chunk)[463](index=463&type=chunk) - Gross margin decreased from **49.8%** in 2017 to **45.7%** in 2018, primarily due to higher plasma procurement costs associated with expanding plasma supply to meet strong demand[482](index=482&type=chunk)[483](index=483&type=chunk) - In 2017, net revenue grew **6.6%** (**7.2%** at constant currency) to **€4.3 billion**, with growth across all divisions and regions; gross margin improved to **49.8%** from **47.2%** in 2016, mainly due to the integration of the acquired NAT donor-screening business[491](index=491&type=chunk)[504](index=504&type=chunk) [Liquidity and Capital Resources](index=85&type=section&id=B.%20Liquidity%20and%20Capital%20Resources) - As of December 31, 2018, the company held **€886.5 million** in cash and cash equivalents and had approximately **€380 million** available under its debt agreements, which is expected to be sufficient for funding requirements for at least the next twelve months[512](index=512&type=chunk)[513](index=513&type=chunk) Historical Cash Flows (in thousands of euros) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Net cash from operating activities** | 737,428 | 841,746 | 553,278 | | **Net cash (used in) investing activities** | (781,867) | (2,185,880) | (506,652) | | **Net cash from/(used in) financing activities** | 152,503 | 1,434,065 | (329,558) | | **Net increase in cash and cash equivalents** | 147,271 | (8,488) | (247,491) | - The company is undertaking a **€1.2 billion** capital investment plan for 2016-2020, primarily to expand manufacturing capacities for the Bioscience division[574](index=574&type=chunk) - Key financing sources include the New Credit Facilities (Tranche A and B term loans totaling **~$5.35B** and **€607M**, plus a **$300M** revolving facility), **€1.0 billion** in 2017 Senior Notes due 2025, and various loans from the European Investment Bank[546](index=546&type=chunk)[550](index=550&type=chunk)[558](index=558&type=chunk) [Contractual Obligations](index=96&type=section&id=F.%20Contractual%20Obligations) Contractual Obligations as of December 31, 2018 (in thousands of euros) | | Total | Less than one year | One to three years | Three to five years | More than five years | | :--- | :--- | :--- | :--- | :--- | :--- | | **Operating leases** | 438,252 | 97,222 | 115,611 | 88,543 | 136,876 | | **Financial debt obligations** | 6,608,822 | 290,336 | 641,520 | 2,174,111 | 3,502,855 | | **Interest — financial debt obligations** | 1,232,329 | 240,890 | 241,141 | 721,025 | 29,273 | | **Licenses and royalties** | 24,284 | 4,291 | 8,336 | 8,287 | 3,370 | | **Total** | **8,303,686** | **632,739** | **1,006,608** | **2,991,966** | **3,672,374** | [Directors, Senior Management and Employees](index=97&type=section&id=Item%206.%20DIRECTORS,%20SENIOR%20MANAGEMENT%20AND%20EMPLOYEES) This section details Grifols' leadership, board practices, compensation, and employee demographics by department and geographic region [Directors and Senior Management](index=97&type=section&id=A.%20Directors%20and%20Senior%20Management) - As of January 1, 2017, Víctor Grifols Roura transitioned to non-executive Chairman, with his son, Víctor Grifols Deu, and his brother, Raimon Grifols Roura, appointed as joint and several Chief Executive Officers[637](index=637&type=chunk)[639](index=639&type=chunk)[640](index=640&type=chunk) - The Board of Directors consists of **13** members, including executive, proprietary, independent, and other external directors[633](index=633&type=chunk)[709](index=709&type=chunk) [Compensation](index=111&type=section&id=B.%20Compensation) - Total compensation paid to all directors in 2018 was **€6.7 million**; this includes fixed and variable components for executive directors and fixed fees for non-executive directors based on board and committee roles[697](index=697&type=chunk) - Senior management (excluding board members) received aggregate compensation of **€16.1 million** in 2018[702](index=702&type=chunk) - The company has a Restricted Share Unit (RSU) Retention Plan where eligible employees can receive up to **50%** of their bonus in Class B shares or ADSs, with the company providing a **50%** match on the elected amount; these RSUs vest after two years and one day[705](index=705&type=chunk) [Employees](index=116&type=section&id=D.%20Employees) Number of Employees by Department (2016-2018) | Department | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Manufacturing** | 17,147 | 14,577 | 11,400 | | **Research & development** | 984 | 963 | 812 | | **Administration and others** | 1,396 | 1,112 | 1,095 | | **Sales and distribution** | 1,265 | 1,227 | 1,164 | | **Other** | 438 | 417 | 406 | | **Total** | **21,230** | **18,296** | **14,877** | Number of Employees by Geographic Region (2016-2018) | Geographic Region | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | **Spain** | 3,858 | 3,649 | 3,430 | | **North America** | 15,330 | 13,671 | 10,557 | | **Rest of the World** | 2,042 | 976 | 890 | | **Total** | **21,230** | **18,296** | **14,877** | [Major Shareholders and Related Party Transactions](index=117&type=section&id=Item%207.%20MAJOR%20SHAREHOLDERS%20AND%20RELATED%20PARTY%20TRANSACTIONS) This section details Grifols' ownership structure, major shareholders, and significant related party transactions, including the 2018 sale of Haema AG and Biotest US Corporation [Major Shareholders](index=117&type=section&id=A.%20Major%20Shareholders) Major Shareholders of Class A (Voting) Shares as of Dec 31, 2018 | Name of Beneficial Owner | Percentage of Ordinary Shares | | :--- | :--- | | Deria S.A. | 8.91% | | Scranton Enterprises B.V. | 8.67% | | Thorthol Holdings B.V. | 7.06% | | Núria Roura Carreras | 6.15% | | Blackrock, Inc. | 4.40% | | Oppenheimerfunds Inc. | 3.07% | | Jupiter Fund Management PLC | 3.04% | [Related Party Transactions](index=119&type=section&id=B.%20Related%20Party%20Transactions) - In December 2018, Grifols sold its **100%** stakes in Haema AG and Biotest US Corporation to Scranton Enterprises B.V., a major shareholder, for **$538 million**; Grifols retains an option to repurchase the shares and continues to operate the plasma centers under a 30-year plasma supply agreement[752](index=752&type=chunk)[754](index=754&type=chunk) - The company makes annual charitable contributions to the Víctor Grifols i Lucas Foundation (**€0.4 million** in 2018) and the Probitas Private Foundation (**€5.4 million** in 2018), which is equal to **0.7%** of its profits before tax[755](index=755&type=chunk)[756](index=756&type=chunk)[757](index=757&type=chunk) [Financial Information](index=120&type=section&id=Item%208.%20FINANCIAL%20INFORMATION) This section covers legal proceedings, primarily patent suits with no material impact, and the company's dividend policy targeting **40%** of net profit - The company is involved in patent infringement lawsuits with bioMérieux and Enzo Life Sciences related to products from the acquired Hologic business, but does not expect a material impact on its financial statements[765](index=765&type=chunk)[766](index=766&type=chunk) - The company's dividend policy targets a payout of approximately **40%** of net consolidated profit, contingent on the Leverage Ratio being below 3.50:1.00 as per its New Credit Facilities[771](index=771&type=chunk) 2018 Dividends Paid | Share Class | Dividend per Share (€) | Total Dividend (€ millions) | | :--- | :--- | :--- | | **Class A** | **0.204** (final) + **0.20** (interim) | **86.9** + **85.2** = **172.1** | | **Class B** | **0.204** (final) + **0.20** (interim) + **0.01** (preferred) | **52.6** + **51.5** + **2.6** = **106.7** | [The Offer and Listing](index=122&type=section&id=Item%209.%20THE%20OFFER%20AND%20LISTING) This section details Grifols' securities trading markets, including Class A and B shares on Spanish exchanges and Class B ADSs on NASDAQ - Grifols' Class A shares are listed on the Spanish Stock Exchanges (ticker: GRF) and Class B shares are also listed there (ticker: GRF.P)[778](index=778&type=chunk) - In the United States, Class B ADSs are listed and traded on the NASDAQ Global Select Market under the symbol "GRFS"; each Class B ADS represents one Class B share[781](index=781&type=chunk) [Additional Information](index=128&type=section&id=Item%2010.%20ADDITIONAL%20INFORMATION) This section details share capital, articles of association, material contracts, and tax regulations, outlining distinct rights of Class A and B shares - The company has two classes of shares: **426,129,798** Class A ordinary shares with voting rights and **261,425,110** Class B non-voting preference shares[823](index=823&type=chunk) - Class B shares have limited voting rights (only on extraordinary matters affecting their rights), are entitled to a minimum annual preferred dividend of **€0.01** per share, and have liquidation preference over Class A shares[867](index=867&type=chunk)[870](index=870&type=chunk)[880](index=880&type=chunk) - Material contracts include the New Credit Facilities, the **€1.0 billion** 3.20% Senior Notes due 2025, and various term loans with the European Investment Bank[892](index=892&type=chunk)[893](index=893&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=147&type=section&id=Item%2011.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section outlines Grifols' market risk exposure, primarily currency risk (USD) mitigated by debt, and interest rate risk from variable-rate debt - The company's main currency risk exposure is to the U.S. dollar, as a significant portion of transactions are denominated in USD; this risk is primarily mitigated by holding U.S. dollar-denominated debt[951](index=951&type=chunk)[952](index=952&type=chunk) - A hypothetical **10%** strengthening of the U.S. dollar against the euro at year-end 2018 would have increased equity by **€506.1 million** and profit by **€4.1 million**[953](index=953&type=chunk) - As of December 31, 2018, **19%** of the company's total debt was at a fixed interest rate; a hypothetical **100 basis point** increase in interest rates during 2018 would have increased interest expense by **€53 million**[956](index=956&type=chunk)[958](index=958&type=chunk) Part II [Controls and Procedures](index=153&type=section&id=Item%2015.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2018 - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were effective[1026](index=1026&type=chunk) - Based on an assessment using the criteria from the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management believes the company's internal control over financial reporting was effective as of December 31, 2018[1030](index=1030&type=chunk) - The independent registered public accounting firm, KPMG Auditores, S.L., issued an unqualified audit report on the effectiveness of the company's internal control over financial reporting[1032](index=1032&type=chunk) [Corporate Governance](index=156&type=section&id=Item%2016.G.%20CORPORATE%20GOVERNANCE) This section details Grifols' corporate governance practices, highlighting differences between Spanish requirements and NASDAQ Listing Rules - As a foreign private issuer, Grifols elects to follow Spanish home country corporate governance practices in lieu of certain NASDAQ Listing Rule 5600 Series requirements[1044](index=1044&type=chunk) - Key differences from NASDAQ rules include shareholder meeting quorum requirements (**25%** of voting capital on first call), exemption from SEC proxy solicitation rules, and different board independence standards[1045](index=1045&type=chunk)[1047](index=1047&type=chunk)[1051](index=1051&type=chunk) - The Audit Committee consists of three independent directors, meeting NASDAQ and Spanish requirements; the Appointments and Remuneration Committee is composed of external directors, with a majority being independent, in line with Spanish law[731](index=731&type=chunk)[733](index=733&type=chunk) Part III [Financial Statements](index=160&type=section&id=Item%2018.%20FINANCIAL%20STATEMENTS) This section contains Grifols' audited consolidated financial statements for 2018, prepared under IFRS, including KPMG's report and detailed notes - The financial statements were prepared in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)[1071](index=1071&type=chunk)[1118](index=1118&type=chunk) - The independent registered public accounting firm, KPMG Auditores, S.L., provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[1084](index=1084&type=chunk)