Grifols(GRFS) - 2020 Q4 - Annual Report

PART I Item 3. KEY INFORMATION This section summarizes Grifols' historical financial data (2018-2020) and outlines key risks impacting its operations and financial health Selected Financial Data This section presents Grifols' historical consolidated financial data for 2018-2020, including key balance sheet and profit and loss figures Consolidated Balance Sheet Data (2018-2020) | Indicator | 2020 (in € thousands) | 2019 (in € thousands) | 2018 (in € thousands) | | :--- | :--- | :--- | :--- | | Total non-current assets | 12,109,822 | 10,180,427 | 8,993,795 | | Total current assets | 3,164,954 | 5,362,184 | 3,483,251 | | Total Assets | 15,274,776 | 15,542,611 | 12,477,046 | | Total Equity | 6,720,055 | 6,845,768 | 4,696,604 | | Total non-current liabilities | 7,219,583 | 7,330,285 | 6,523,121 | | Total current liabilities | 1,335,138 | 1,366,558 | 1,257,321 | | Total Liabilities | 8,554,721 | 8,696,843 | 7,780,442 | Consolidated Statement of Profit and Loss Data (2018-2020) | Indicator | 2020 (in € thousands) | 2019 (in € thousands) | 2018 (in € thousands) | | :--- | :--- | :--- | :--- | | Net revenue | 5,340,038 | 5,098,691 | 4,486,724 | | Gross margin | 2,255,165 | 2,341,232 | 2,049,560 | | Operating Result | 996,132 | 1,131,365 | 994,124 | | Profit attributable to the Parent | 618,546 | 625,146 | 596,642 | | Basic earnings per ordinary share (€) | 0.90 | 0.91 | 0.87 | Risk Factors This section details the company's primary risks, categorized into structural, business, healthcare industry, and securities-related factors - The company's substantial level of indebtedness, €7.0 billion as of December 31, 2020, could adversely affect its financial condition and restrict its ability to react to business changes[36] - The COVID-19 pandemic has had, and could continue to have, a material adverse impact on operations, including manufacturing, supply chains, and clinical trials[34][79] - A significant portion of net revenue (approximately 47% in 2020) is derived from immunoglobulin products, making the company vulnerable to adverse market events affecting these products[34][81] - The company faces risks from potential changes to the U.S Patient Protection and Affordable Care Act (ACA) and other government regulations that could affect pharmaceutical pricing and reimbursement[35][152][153] - The Grifols Family and Scranton Enterprises B.V. own approximately 36% of Class A shares, giving them significant influence over matters requiring shareholder approval, including the election of the board of directors[35][189] Item 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Grifols, detailing its history, business structure, global operations, R&D, properties, and regulatory landscape History of and Development of the Company Founded in 1940, Grifols has grown into a global, vertically integrated plasma derivatives producer, marked by key acquisitions and significant operational capacity - Grifols is a vertically integrated global producer of plasma derivatives, ranking among the top three in the industry[203] - As of year-end 2020, the company operated 312 plasma collection centers in the U.S and Germany with a manufacturing capacity of approximately 15.2 million liters of plasma per year[203] - Significant recent acquisitions include a 100% stake in Alkahest, Inc and plasma facilities from GC Pharma in 2020, expanding its R&D and manufacturing capabilities[210] Business Overview Grifols operates five divisions, with Bioscience as the largest, maintaining a strong global presence and a vertically integrated business model Net Revenue by Division (2020) | Division | Net Revenue (in € thousands) | % of Total Net Revenue | | :--- | :--- | :--- | | Bioscience | 4,252,502 | 79.5% | | Diagnostic | 775,889 | 14.5% | | Hospital | 118,675 | 2.2% | | Bio Supplies | 224,090 | 4.2% | | Others | 31,989 | 0.6% | | Total | 5,340,038 | 100.0% | Net Revenue by Region (2020) | Region | Net Revenue (in € thousands) | % of Total Net Revenue | | :--- | :--- | :--- | | United States and Canada | 3,599,746 | 67.4% | | European Union | 834,492 | 15.6% | | Rest of the World | 905,800 | 17.0% | | Total | 5,340,038 | 100.0% | - The company is vertically integrated across the entire value chain, from plasma collection through 312 centers to the marketing and distribution of final products[227][228] - Research and development spending was €294.2 million in 2020, with 1,107 employees dedicated to R&D Key projects include treatments for Alzheimer's disease (AMBAR study) and COVID-19 (ITAC study)[313][317][318] Organizational Structure Grifols, S.A. is the parent of a global group comprising 63 consolidated and 12 equity-method companies, reflecting a unified corporate strategy - As of December 31, 2020, the Grifols Group was comprised of 63 fully consolidated companies[386] - The Group also held interests in 12 companies that were accounted for using the equity method, where its ownership is between 20% and 50%[386] Property, Plant and Equipment Grifols operates major manufacturing facilities globally, including plasma fractionation plants with a combined capacity of 15.2 million liters per year, and a global operations center - The company operates four plasma fractionation plants located in Parets (Spain), Los Angeles (USA), Clayton (USA), and a newly acquired facility in Montreal (Canada)[388][392][396] - The combined fractionation capacity of its facilities is approximately 15.2 million liters per year, with plans to increase this to 21 million liters by 2022 and 28 million by 2026[203][392] - A global operations center in Dublin, Ireland, centralizes key functions for the Bioscience division, including logistics, distribution, and treasury[398] Regulatory Matters Grifols is subject to extensive government regulation in the U.S., Europe, and other international markets, covering product authorization, anti-fraud, and pricing/reimbursement - In the U.S., Grifols' plasma derivative products are regulated as biologics and require an approved Biologics License Application (BLA) from the FDA to be marketed[401][402] - The company's activities are subject to anti-fraud and abuse regulations in the U.S., such as the Anti-Kickback Law and the False Claims Act (FCA), with potential for severe civil and criminal penalties[417][418][419] - In the European Union, medicines are authorized via a centralized procedure through the EMA or through national authorization procedures The withdrawal of the U.K from the EU (Brexit) has introduced new regulatory pathways for the U.K market[427][437][438] - Sales are dependent on reimbursement from third-party payors, including government programs like Medicare and Medicaid in the U.S., which are increasingly challenging prices and examining cost-effectiveness[456][457] Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes Grifols' 2020 financial performance, including revenue, margins, liquidity, capital resources, and the impact of COVID-19 and acquisitions Operating Results In 2020, net revenue grew 4.7% to €5.34 billion, despite a €205 million inventory write-down, with profit before tax increasing 7.5% due to improved finance results Financial Performance Comparison (2019 vs. 2020) | Indicator | 2020 (in € thousands) | 2019 (in € thousands) | % Change | | :--- | :--- | :--- | :--- | | Net revenue | 5,340,038 | 5,098,691 | 4.7% | | Gross margin | 2,255,165 | 2,341,232 | (3.7)% | | Operating result | 996,132 | 1,131,365 | (12.0)% | | Profit before income tax | 878,629 | 817,103 | 7.5% | | Consolidated profit for the year | 708,990 | 648,644 | 9.3% | - The COVID-19 pandemic had a net negative impact of €155 million on 2020 operating results, which includes a €205 million inventory write-down, reduced revenues, offset by a €112 million expense containment plan and strong sales of a SARS-CoV-2 diagnostic test[485] - The Bioscience division's revenue grew 6.2% to €4.2 billion, driven by strong immunoglobulin and albumin sales The Diagnostic division's revenue increased 5.8% to €775.9 million, largely due to its TMA molecular test for SARS-CoV-2[515][519] - Finance costs decreased by 35.3% to €177.7 million, mainly due to debt refinancing in late 2019 and a €57 million capital gain from the Shanghai RAAS transaction[535] Liquidity and Capital Resources As of December 31, 2020, Grifols maintained a strong liquidity position, with operating cash flow significantly increasing to €1.1 billion, supporting strategic investments and a diversified debt structure - As of December 31, 2020, the company had a liquidity position of approximately €1.5 billion, consisting of €579.6 million in cash and €922.5 million in undrawn credit lines[575][484] Historical Cash Flows (2018-2020) | Cash Flow Activity (in € thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 1,110,336 | 568,933 | 737,428 | | Net cash (used in) investing activities | (858,115) | (548,789) | (781,867) | | Net cash from/(used in) financing activities | (354,401) | (332,356) | 152,503 | - The company is undertaking a €1.4 billion investment plan from 2018 through 2022, focusing on expanding manufacturing capacities for the Bioscience division and growing its plasma center network[602] - Key financing sources include the 2019 Credit Facilities (comprising Senior Term Loans and Revolving Loans), €1.0 billion in 3.20% Senior Unsecured Notes due 2025, and €1.675 billion in Senior Secured Notes issued in 2019[612][619][627] Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details Grifols' Board of Directors, senior management, compensation, board practices, and global workforce of 23,655 employees as of year-end 2020 Directors and Senior Management The Board of Directors is led by non-executive Chairman Víctor Grifols Roura, with joint CEOs Víctor Grifols Deu and Raimon Grifols Roura, supported by an experienced senior management team - Víctor Grifols Roura serves as the non-executive Chairman of the Board[657][660] - Víctor Grifols Deu and Raimon Grifols Roura have served as joint and several Chief Executive Officers since January 1, 2017, as part of a planned succession[657][663][665] - The senior management team is composed of long-tenured executives with deep industry experience, responsible for global operations across all divisions[690] Compensation In 2020, total director compensation was €5 million, senior management received €17.2 million, and an RSU Retention Plan allows employees to receive bonuses in Class B shares - Total compensation paid to the Board of Directors in 2020 was €5 million[730] - Senior management (excluding directors) received aggregate compensation of €17.2 million in 2020[733] - The company maintains a Restricted Share Unit (RSU) Retention Plan where eligible employees can elect to receive up to 50% of their bonus in Class B shares, which the company matches with an additional 50% of the elected amount, subject to a two-year vesting period[737] Board Practices The Board of Directors, comprising 13 members with three committees, follows Spanish corporate governance practices, which differ from NASDAQ standards - The Board is composed of 13 directors elected for four-year terms[740][741] - The Board has an Audit Committee, an Appointments and Remuneration Committee, and a Sustainability Committee[756] - The Audit Committee consists of three members, all of whom are independent in conformity with Exchange Act and NASDAQ Listing Rules[762] - A new Sustainability Committee was established on December 11, 2020, to monitor corporate governance, environmental, and social practices[769][770] Employees As of December 31, 2020, Grifols had 23,655 employees globally, with the majority in manufacturing and North America being the largest region Employees by Geographic Region (Year-End) | Geographic Region | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Spain | 4,292 | 4,134 | 3,858 | | North America | 16,756 | 17,479 | 15,330 | | Rest of the World | 2,607 | 2,390 | 2,042 | | Total | 23,655 | 24,003 | 21,230 | - The largest department by employee count is Manufacturing, with 19,049 employees as of year-end 2020[774] Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details Grifols' Class A share ownership, including major shareholders, and significant related party transactions, such as the $538 million sale of Haema AG and Biotest US Corporation Major Shareholders of Class A (Voting) Shares as of Dec 31, 2020 | Name of Beneficial Owner | Percentage of Ordinary Shares | | :--- | :--- | | Deria S.A. | 9.16% | | Scranton Enterprises B.V. | 8.13% | | Thorthol Holdings B.V. | 7.09% | | Núria Roura Carreras | 6.15% | | Blackrock, Inc. | 4.47% | - In December 2018, Grifols sold its stakes in Haema AG and Biotest US Corporation to major shareholder Scranton Enterprises B.V for $538 million Grifols retains an option to repurchase the shares and has a 30-year plasma supply agreement with the entities[790][791] - The company contributes annually to the Víctor Grifols i Lucas Foundation and the Probitas Private Foundation, both of which have connections to the Grifols family and directors In 2020, contributions were €0.4 million and €9.9 million, respectively[792][793][794] Item 8. FINANCIAL INFORMATION This section presents Grifols' audited financial statements, details legal proceedings including a $4 million arbitration award, and outlines the dividend policy targeting 40% of net consolidated profits - The company is involved in a legal dispute with Abbott Laboratories over unpaid royalties, where an arbitrator awarded $4 million to GDS/Ortho in June 2020 The court litigation is ongoing[801] - The company's dividend policy targets a payout of approximately 40% of net consolidated profits, subject to debt covenants[809] - In October 2020, shareholders approved a dividend of €0.162 per Class A share (totaling €68.9 million) and €0.162 per Class B share (totaling €41.8 million), plus a preferred dividend of €0.01 per Class B share[811][813] Item 10. ADDITIONAL INFORMATION This section details Grifols' corporate structure, share capital, and governing documents, outlining the rights of Class A and Class B shares, material contracts, and tax considerations - The company's share capital consists of 426,129,798 Class A voting shares and 261,425,110 Class B non-voting shares[860] - Class B shares have a preferred annual dividend of €0.01 per share, which is paid before any dividend to Class A shareholders They also receive the same ordinary dividends as Class A shares[812][908] - While generally non-voting, Class B shares have voting rights on specific extraordinary matters, such as mergers, dissolution, delisting, or any resolution that adversely affects their rights[904][905][913] - Dividends paid by Grifols to non-residents of Spain are generally subject to a 19% withholding tax, which may be reduced to 15% for eligible U.S holders under the U.S.-Spain tax treaty[943][944] Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details Grifols' exposure to market risks, primarily currency fluctuations (USD/EUR) and interest rate volatility, with mitigation strategies in place - The company's primary market risk exposure is to currency fluctuations, particularly between the U.S dollar and the euro This is mitigated by holding debt denominated in U.S dollars[981][982] - A hypothetical 10% strengthening of the U.S dollar against the euro at year-end 2020 would have increased equity by €750.6 million and profit by €13.2 million[983] - As of December 31, 2020, 46% of the company's total debt was at a fixed interest rate, mitigating exposure to interest rate volatility[987] - A hypothetical 100 basis point increase in interest rates during 2020 would have increased interest expense by €36.2 million[989] PART II Item 15. CONTROLS AND PROCEDURES This section confirms the effectiveness of Grifols' disclosure controls and internal control over financial reporting as of December 31, 2020, as assessed by management and audited by KPMG - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[1076] - Management assessed the effectiveness of internal control over financial reporting using the criteria from the COSO Internal Control — Integrated Framework (2013) and found it to be effective[1080] - The independent registered public accounting firm, KPMG Auditores, S.L., issued an unqualified attestation report on the effectiveness of the company's internal control over financial reporting[1081] Corporate Governance and Other Matters This section covers corporate governance, including the Audit Committee Financial Expert, Code of Ethics, KPMG fees (€6.1 million), a share buy-back program, and differences from NASDAQ standards - The Board has determined that Steven F Mayer is an "audit committee financial expert" and is an independent director[1084] Principal Accountant Fees (KPMG) | Service Category | 2020 (in € thousands) | 2019 (in € thousands) | | :--- | :--- | :--- | | Audit fees | 5,567 | 5,080 | | Audit-related fees | 399 | 651 | | Tax fees | 11 | 55 | | All other fees | 105 | 85 | | Total | 6,082 | 5,871 | - In March 2021, the Board implemented a share buy-back program to acquire up to 1% of the company's share capital (4,261,298 Class A shares and 2,614,251 Class B shares) for a maximum investment of €125 million, intended for future acquisitions[1095][1097][1098] - As a foreign private issuer, Grifols follows Spanish corporate governance practices, which differ from NASDAQ rules for U.S companies regarding board independence, shareholder quorum, and proxy solicitations[1103][1104] PART III Item 18. FINANCIAL STATEMENTS This section presents Grifols' audited consolidated financial statements (2018-2020), prepared under IFRS, along with KPMG's unqualified opinion on both the financials and internal controls - The financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and cash flows for the three-year period ended December 31, 2020, in conformity with IFRS[1140] - The independent auditor, KPMG, identified the evaluation of the Diagnostic goodwill impairment analysis as a critical audit matter due to the significant judgment required in evaluating assumptions related to future cash flows, perpetual growth rate, and the discount rate[1149][1151] - The company adopted IFRS 16 Leases on January 1, 2019, changing its method of accounting for leases, but did not restate comparative figures for 2018 as permitted by the standard's transitional provisions[1141][1238]