EUR 850.00 For Business Accounts Only

Morningstar | Raising Grifols Valuation Post-3Q; Raising EBITDA Margin Assumption, Adjusting Foreign Exchange

Grifols reported continued solid constant currency growth in the third quarter, with 9.5% growth in the Bioscience segment (80% of total sales), and we're slightly adjusting our fair value estimate to EUR 22.50 (maintaining our $25.50 fair value estimate) based on foreign exchange fluctuations and a slight raise in our assumed EBITDA margin for the year. Despite competition from Roche's Hemlibra that is impacting factor VIII demand, the demand for other key plasma-derived proteins (immunoglobulin, albumin, and alpha-1 antitrypsin) remains strong, and Grifols noted stronger pricing for immunoglobulin in the quarter. Grifols is investing in new plasma collection centers as well as acquiring mature collection centers (with the recent Haema acquisition, option to acquire the remaining 51% stake in Interstate Blood Bank in 2019, and recent acquisition of 24 Biotest centers) to secure long-term plasma supply. Overall, we think Grifols’ narrow moat is stable, as the plasma business remains a stable oligopoly despite innovation that could compete with certain niches of the plasma protein market.

As we discussed in our  Oct 29 note, Grifols recently reported solid phase 2b/3 data from the Ambar trial in Alzheimer’s disease. Once the analysis is complete and data is published, support from the American Society for Apheresis (ASFA) for the use of plasmapheresis as a treatment for Alzheimer's could further boost demand and potentially pricing power for albumin. However, we think financial impact is limited by constrained supply of plasma, and it will take years for Grifols to not only verify these results in larger studies but also for industry players to build enough collection and fractionation capacity to attempt to meet potential demand.

We expect Grifols to see adjusted EBITDA margins around 28.5% for the full year (above our previous 28% estimate), and we see a strong rebound in 2019-20 as new plasma centers become more established, mature collection centers from Haema, Biotest, and Interstate Blood Bank are tucked under Grifols’ wing, and factor VIII competition declines become less severe. Grifols’ adjusted EBITDA margin of 28.4% in the quarter was a slight step down from the steady 30% adjusted EBITDA margins in 2017, and roughly 29% EBITDA margin in the first half 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. Grifols also expects data for a subcutaneous 20% immunoglobulin in primary immune deficiencies this year, so the firm, which is already the global leader in the immunoglobulin market, could begin to see more price and volume benefits to U.S. growth beginning as early as 2019.