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Morningstar | Grifols' 2Q Looks Steady as Firm Dips Toes Into China Plasma Collection

Grifols reported continued solid constant-currency growth in the second quarter, with 7.4% growth in the Bioscience segment (80% of total sales), despite a particularly strong quarter in 2017 for comparison purposes as well as stronger headwinds in the factor VIII business. Despite competition from Roche's Hemlibra that is affecting factor VIII demand, the demand for other key plasma-derived proteins (immunoglobulin, albumin, and alpha-1 antitrypsin) remains strong, and we're not making any changes to our fair value estimate.

Grifols is investing in new plasma collection centers as well as acquiring mature collection centers (with the recent Haema acquisition and option to acquire the remaining 51% stake in Interstate Blood Bank in 2019) to secure long-term plasma supply. We're also intrigued by Grifols' recent decision to begin plasma collection in China, an area it has previously felt too risky to undertake; the May 2018 agreement with Boya Bio-Pharmaceutical in China will result in the creation of jointly run plasma centers, with plasma going to Boya initially but with Grifols investing EUR 50 million and retaining rights to 50% of collected plasma down the road. While this is a small step compared with CSL's $350 million acquisition of plasma player Ruide last year, we think it gives them an opportunity to expand exposure to the China market in the long run (currently Grifols sells albumin in China, but the product is collected and fractionated overseas).

Overall, we think Grifols’ narrow moat is stable, as the plasma business remains a stable oligopoly with no disruptive threats on the horizon.

We expect Grifols to see adjusted EBITDA margins around 28% for the full year, but we see a strong rebound in 2019-20 as new plasma centers become more established, mature collection centers from Haema and Interstate Blood Bank are tucked under Grifols’ wing, and factor VIII competition declines become less severe. Grifols’ adjusted EBITDA margin of 28.9% in the quarter was a slight step down from the steady 30% adjusted EBITDA margins in 2017, but relatively flat from 29.1% in the first quarter of 2018. Bioscience-related costs have been increasing as Grifols opens more plasma donation centers and as plasma donor compensation has increased. In addition, the increased factor VIII competition does slightly weigh on margins, as Grifols isn’t able to sell as many products following the costs of plasma collection and fractionation.