Grifols(US:GRFS)2023-04-18 13:25PART I KEY INFORMATION This section outlines the most critical information for investors, focusing on the significant risks that could impact the company's business, financial condition, and the value of its securities, categorizing them into structural, business-related, and industry-specific factors Risk Factors The company faces substantial risks related to its financial structure, primarily its high level of indebtedness, alongside business and operational risks including dependency on plasma supply, complex manufacturing processes, competition, and regulatory adherence, with industry-wide risks stemming from healthcare reforms and pricing pressures, and share-related risks from market volatility and founding family influence - The company's substantial level of indebtedness is a key structural risk, with total current and non-current financial liabilities amounting to €10.76 billion as of December 31, 202235 - A significant portion of revenue is derived from immunoglobulin (IG) products, accounting for approximately 43% of net revenue in 2022, making the company vulnerable to adverse market events affecting these products85 - The COVID-19 pandemic negatively impacted plasma collection volumes due to mobility restrictions and other factors, leading to increased donor fees and higher costs per liter82 - The Grifols Family and Scranton Enterprises B.V. collectively own approximately 36% of Class A shares, giving them significant influence over matters requiring shareholder approval, including the election of the board211 INFORMATION ON THE COMPANY This section provides a comprehensive overview of Grifols, detailing its history, business operations, organizational structure, physical assets, and the regulatory landscape it navigates, highlighting the company's vertical integration in the plasma derivatives market, its global presence, and its strategic acquisitions History of and Development of the Company Founded in 1940, Grifols has evolved from a Spanish domestic company into a global, vertically integrated producer of plasma derivatives, with growth driven by organic expansion and significant acquisitions, including Talecris (2011), Novartis's diagnostic business (2014), and Biotest AG (2022), operating 392 plasma collection centers with an annual manufacturing capacity of approximately 22 million liters as of year-end 2022 - As of December 31, 2022, Grifols operated 392 plasma collection centers and had an annual manufacturing capacity of approximately 22 million liters of plasma226 - Key strategic acquisitions include Talecris Biotherapeutics in 2011 for $3.7 billion, Novartis's diagnostic business in 2014 for $1.7 billion, and Biotest AG in 2022 for a total consideration of €1.09 billion232240 Business Overview Grifols operates through five business units: Plasma Procurement, Biopharma, Diagnostic, Bio Supplies, and Others, with the Biopharma unit being the largest, generating 82.5% of total net revenue in 2022, and a strong global presence where the United States and Canada account for 63.6% of its revenue, all within a vertically integrated business model covering the entire value chain from plasma collection to product distribution Net Revenue by Business Unit (2020-2022) | Business Unit | 2022 Revenue (€M) | % of Total 2022 | 2021 Revenue (€M) | 2020 Revenue (€M) | |---|---|---|---|---| | Biopharma | 5,005.4 | 82.5% | 3,815.0 | 4,242.5 | | Diagnostic | 671.3 | 11.1% | 779.1 | 775.9 | | Bio Supplies | 146.1 | 2.4% | 115.8 | 133.2 | | Others | 250.2 | 4.1% | 266.5 | 222.5 | | Total | 6,064.0 | 100.0% | 4,933.1 | 5,340.0 | Net Revenue by Geographic Region (2020-2022) | Region | 2022 Revenue (€M) | % of Total 2022 | 2021 Revenue (€M) | 2020 Revenue (€M) | |---|---|---|---|---| | United States and Canada | 3,855.6 | 63.6% | 3,154.5 | 3,599.7 | | European Union | 1,032.2 | 17.0% | 906.4 | 834.5 | | Rest of the World | 1,176.2 | 19.4% | 872.1 | 905.8 | | Total | 6,064.0 | 100.0% | 4,933.1 | 5,340.0 | - The company holds a leading market position in several product categories, including an estimated 71% global sales market share for Alpha-1 Antitrypsin (AAT) as of December 2021 and an estimated 25.6% market share in immunoglobulin (IG) volume in the United States as of November 2022283286 Research & Development Expenditure (2020-2022) | Year | R&D Spending (€M) | |---|---| | 2022 | 361.1 | | 2021 | 354.9 | | 2020 | 294.2 | Organizational Structure Grifols, S.A. is the parent company of the Grifols Group, which comprised 87 companies as of December 31, 2022, with subsidiaries where Grifols holds a majority of equity or voting rights being fully consolidated, and an additional five companies accounted for using the equity method, reflecting ownership between 20% and 50% - As of December 31, 2022, the Grifols Group consisted of 87 companies, with an additional five companies accounted for using the equity method419 Property, Plant and Equipment The company owns or leases principal facilities across seven countries, including five plasma fractionation plants in Spain, the U.S., and Germany, with these facilities having a combined fractionation capacity of approximately 22 million liters per year as of December 31, 2022, and key manufacturing sites located in Parets (Spain), Los Angeles (USA), Clayton (USA), and Dreieich (Germany) - The company's plasma derivative products are manufactured at facilities in Parets (Spain), Los Angeles (USA), Clayton (USA), and Dreieich (Germany), with a total fractionation capacity of approximately 22 million liters per year as of year-end 2022426 - The Clayton, North Carolina facility is one of the world's largest integrated protein manufacturing sites, with a fractionation capacity of 11.8 million liters per year429 Regulatory Matters Grifols operates in a highly regulated industry, subject to extensive oversight from authorities like the FDA in the U.S. and the EMA in Europe, with the regulatory framework governing all aspects of the business from plasma collection and manufacturing (cGMP) to product approval (BLA), marketing, and post-approval surveillance, and the company also navigates complex pharmaceutical pricing and reimbursement systems, including Medicare, Medicaid, and the 340B Program in the U.S., as well as price controls in the E.U - The company's products, such as plasma derivatives, are regulated as biologics in the U.S. and require an approved Biologics License Application (BLA) from the FDA to be marketed436 - Plasma collection centers must be licensed and are subject to periodic inspections by regulatory authorities like the FDA and EMA to ensure compliance with cGMP448 - In the U.S., the company is subject to multiple government pricing and reimbursement programs, including Medicaid rebates, Medicare Part B (based on Average Sales Price), and the 340B Drug Pricing Program, which requires providing discounts to eligible healthcare entities495496505 OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes Grifols' financial performance and condition for the fiscal year 2022 compared to previous years, covering operating results, liquidity, capital resources, research and development activities, and key trends affecting the business, highlighting revenue growth driven by the Biopharma segment, margin pressures from high plasma costs, and strategic initiatives such as acquisitions and a new operational improvement plan Operating Results In 2022, net revenue grew 22.9% to €6.1 billion, driven by a 31.2% increase in the Biopharma segment due to strong demand and higher plasma collections, though gross margin declined from 39.8% to 36.8% due to high plasma costs from H1 2022 and the non-recurrence of COVID-19 test sales, while operating profit increased by 35.4% to €805.7 million, and the company announced an operational improvement plan in February 2023 to achieve €400 million in annualized cost savings Consolidated Statement of Profit and Loss (2021 vs. 2022) | Metric | 2022 (€M) | 2021 (€M) | Change (%) | |---|---|---|---| | Net revenue | 6,064.0 | 4,933.1 | 22.9% | | Gross margin | 2,231.5 | 1,962.6 | 13.7% | | Operating result | 805.7 | 595.1 | 35.4% | | Profit before income tax | 361.3 | 350.5 | 3.1% | | Consolidated profit for the year | 271.1 | 265.3 | 2.2% | - Biopharma revenue increased by 31.2% in 2022, driven by higher plasma collections, strong demand for key proteins, and price increases566567 - Gross margin fell to 36.8% in 2022 from 39.8% in 2021, primarily due to the high cost per liter of plasma collected in H1 2022 and the impact of lower sales of high-margin COVID-19 tests573 - In February 2023, Grifols announced an operational improvement plan targeting approximately €400 million in annualized cost savings, with a one-time restructuring charge of €140 million recorded in Q1 2023518555 Liquidity and Capital Resources The company's liquidity is primarily sourced from operating cash flows and debt financing, with cash and cash equivalents of €548.0 million and an additional €1.05 billion available under debt agreements as of December 31, 2022, though net cash from operating activities was negative €10.9 million in 2022, a significant decrease from a positive €597.0 million in 2021, largely due to an increase in inventory, and the company is committed to deleveraging and has suspended dividends until its leverage ratio is below 4.0x Historical Cash Flows (2020-2022) | Cash Flow Activity (€M) | 2022 | 2021 | 2020 | |---|---|---|---| | Net cash from operating activities | (10.9) | 597.0 | 1,110.3 | | Net cash (used in) investing activities | (1,978.8) | (854.1) | (858.1) | | Net cash from/(used in) financing activities | (173.5) | 2,297.7 | (354.4) | - As of December 31, 2022, the company had €548.0 million in cash and cash equivalents and €1.048 billion available under its debt agreements602 - The company's principal debt includes the First Lien Credit Facilities (€1.26 billion and $2.31 billion outstanding), 2017 Notes (€1.0 billion), 2019 Notes (€1.58 billion), and 2021 Notes (€1.4 billion and $705 million)655656663674 - Working capital was negatively impacted in 2022 by a €600.3 million increase in inventory levels, driven by higher plasma costs and increased donation volumes, causing inventory turnover to rise to 296 days from 278 days in 2021610611618 Research and Development, Patents and Licenses This section references Item 4.B for detailed information on the company's research and development activities, patents, and licenses - For detailed information on Research and Development, refer to Item 4.B of the report687 Trend Information The global market for plasma-derived products is expected to continue growing, driven by population growth, new therapeutic applications, and increased patient diagnosis, with the industry having high barriers to entry due to significant regulation and capital investment, and plasma collection levels, which were impacted by COVID-19, increased by 25% in 2022 compared to 2021, surpassing 2019 levels - The worldwide plasma proteins market reached $29.2 billion in 2021, showing a compound annual growth rate of 7.3% from 2018688 - Plasma collections improved significantly in 2022, increasing by 25% compared to 2021 and surpassing pre-pandemic levels from 2019692 - The company has an operational improvement plan in place to enhance competitiveness and achieve cost efficiencies across the organization696 Critical Accounting Estimates The preparation of financial statements under IFRS requires management to make significant estimates and judgments, with key areas involving critical accounting policies including the valuation of goodwill, impairment testing, and the capitalization of development costs, and these policies are periodically reviewed by the Audit Committee - The company's critical accounting policies involve significant management judgment, particularly in areas such as goodwill impairment, depreciation, and amortization699 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's leadership and workforce, detailing the composition of the Board of Directors and senior management, their compensation, board practices including committee structures, and employee statistics, noting that as of year-end 2022, the company had 26,314 employees Directors and Senior Management The Board of Directors consists of 11 members, with Thomas H. Glanzmann appointed Executive Chairperson in February 2023, succeeding Steven Mayer, and Raimon Grifols Roura and Víctor Grifols Deu serving as co-CEOs, while the senior management team was also updated in 2022 to align with the company's strategic plan - As of February 21, 2023, Thomas H. Glanzmann serves as the Executive Chairperson of the Board702 - Raimon Grifols Roura and Víctor Grifols Deu are the joint and several Chief Executive Officers of the company708710 Compensation In 2022, the total compensation for the Board of Directors was €5.3 million, while senior management (excluding board members) received an aggregate compensation of €13.9 million, and the co-CEOs voluntarily waived 50% of their short-term variable remuneration for fiscal year 2021 (payable in 2022) Aggregate Compensation (2021-2022) | Group | 2022 (€) | 2021 (€) | |---|---|---| | Board of Directors | 5,300,000 | N/A | | Senior Management (non-directors) | 13,890,763 | 15,135,947 | - The Co-Chief Executive Officers voluntarily waived 50% of their short-term variable remuneration for fiscal year 2021, which was payable in March 2022759 Board Practices The Board consists of 11 directors elected for four-year terms and has three primary committees: the Audit Committee, the Appointments and Remuneration Committee, and the Sustainability Committee, with the company, as a foreign private issuer, following Spanish corporate governance practices, which differ in some aspects from NASDAQ requirements, such as board composition and quorum rules - The Board has three committees: Audit, Appointments and Remuneration, and Sustainability797 - The Audit Committee is composed of three independent directors, in compliance with NASDAQ and Spanish requirements803 Employees As of December 31, 2022, Grifols had a total of 26,314 employees worldwide, with the majority of the workforce in manufacturing (21,235) and located in North America (16,862), and the company provides various employee benefits, including pension and savings plans Total Employees by Year | Year | Total Employees | |---|---| | 2022 | 26,314 | | 2021 | 23,233 | | 2020 | 23,655 | - In 2022, the largest department was Manufacturing with 21,235 employees, and the largest geographic region was North America with 16,862 employees817 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the ownership structure and transactions with related parties, noting that the Grifols family and affiliated entities hold a significant portion of the company's voting shares, and key related party transactions include the 2018 sale of Haema AG and Biotest US Corporation to Scranton Plasma B.V. and contributions to charitable foundations Major Shareholders of Class A (Voting) Shares | Shareholder | Voting Rights (%) | |---|---| | Deria S.A. | 9.195% | | Scranton Enterprises B.V. | 8.404% | | Ponder Trade, S.L. | 7.089% | | Ralledor Holding Spain S.L. | 6.154% | | Capital Research and Management Company | 5.659% | | Blackrock, Inc. | 4.142% | - In 2018, the company sold its stakes in Haema AG and Biotest US Corporation to Scranton Plasma B.V., a major shareholder, for $538 million, and Grifols retains a 30-year plasma supply agreement with these entities838839 FINANCIAL INFORMATION This section covers legal proceedings and the company's dividend policy, noting that Grifols is involved in several legal matters, including a settled class action related to the Illinois Biometric Information Privacy Act (BIPA) and an ongoing request with OFAC regarding Biotest's activities in Iran, and the company's dividend policy targets a 40% payout but is currently suspended to prioritize deleveraging - The company settled a class action lawsuit related to the Illinois Biometric Information Privacy Act (BIPA) for $16.75 million, with final court approval pending851852 - Grifols has requested guidance or a license from the U.S. Office of Foreign Assets Control (OFAC) regarding Biotest AG's pre-existing product-supply agreements with Iranian entities848850 - The company's dividend policy aims for a 40% payout of net consolidated profits, but cash dividend distributions are not expected until the debt leverage ratio falls below 4.00:1.00, and no dividend was paid in 2022859862 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Grifols is exposed to market risks, primarily from changes in foreign exchange rates (especially USD/EUR) and interest rates, with a significant portion of revenue in U.S. dollars while debt is in both euros and dollars, and as of December 31, 2022, 37% of the company's debt was at a variable interest rate - A 10% strengthening of the U.S. dollar against the euro would have increased equity by €892.8 million as of December 31, 20221051 - As of December 31, 2022, 37% of the company's debt (€3.4 billion) was at a variable interest rate, exposing it to cash flow interest rate risk1053 - A 100 basis point increase in interest rates would have increased the annual interest expense by €34.7 million as of December 31, 20221055 PART II CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, with a material weakness identified in the 2021 audit related to the classification of complex financial instruments successfully remediated during 2022, and the assessment of internal controls for 2022 excluded the recently acquired Biotest AG Group - Management concluded that disclosure controls and procedures were effective as of December 31, 20221144 - A material weakness related to risk assessment over the classification of complex financial instruments, identified in the 2021 audit, was remediated as of December 31, 20221152 - The recently acquired Biotest AG Group was excluded from management's assessment of internal control over financial reporting for the year ended December 31, 20221150 CORPORATE GOVERNANCE As a foreign private issuer, Grifols follows its home country (Spain) corporate governance practices in lieu of certain NASDAQ listing rules, with this section outlining the significant differences, particularly concerning board independence, shareholder meeting quorums, and committee composition, while the company complies with Spanish law, which requires an Audit Committee, an Appointments and Remuneration Committee, and a Sustainability Committee with specific compositions of non-executive and independent directors - Grifols follows Spanish corporate governance practices, which differ from NASDAQ rules regarding board independence majority, shareholder meeting quorums, and shareholder approval for certain equity compensation plans117111721176 - Spanish law requires the Board to have an Audit Committee, an Appointments and Remuneration Committee, and a Sustainability Committee, with specific rules on their composition, including a majority of independent directors for the Audit and Sustainability committees797800809812 PART III FINANCIAL STATEMENTS This section contains the audited consolidated financial statements for Grifols, S.A. and its subsidiaries for the fiscal years ended December 31, 2022, and 2021, prepared in accordance with IFRS, with the independent auditor's report from KPMG identifying two critical audit matters: the impairment analysis of goodwill for the Diagnostic cash-generating unit (CGU) and the impairment assessment of the equity method investment in Shanghai RAAS - The independent auditor, KPMG Auditores, S.L., issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 20221220 - The audit identified two Critical Audit Matters: 1) Evaluation of the Diagnostic goodwill impairment analysis, due to the subjectivity of assumptions like sales projections and discount rates. 2) Impairment assessment of the Shanghai RAAS equity method investment, due to the high degree of judgment in evaluating perpetual growth and discount rates122812301236 Consolidated Balance Sheet Summary (as of Dec 31) | Metric (€M) | 2022 | 2021 | |---|---|---| | Total Assets | 21,534.0 | 19,233.8 | | Total Liabilities | 13,076.4 | 11,916.7 | | Total Equity | 8,457.5 | 7,317.1 |