Grifols, S.A. — 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide separate Q4 results. Financial statements are audited and prepared under IFRS as issued by the IASB. Unless indicated otherwise, amounts below are in euros.
Business context
Grifols is a Spain-based global healthcare company focused on plasma-derived medicines, diagnostics and hospital products. Bioscience generated 79.4% of 2017 revenue, Diagnostic 17.0%, Hospital 2.4%, Bio Supplies 1.6% and Other 0.4%. The United States and Canada contributed 67.1% of revenue; management said approximately 76% of revenue was denominated in U.S. dollars. IVIG products represented approximately 40% of revenue.
Key financial metrics
| Metric | 2017 | 2016 | Change or context |
|---|---|---|---|
| Net revenue | €4.318bn | €4.050bn | +6.6% reported; +7.2% at constant currency |
| Gross profit / margin | €2.152bn / 49.8% | €1.912bn / 47.2% | Margin improved 2.6 percentage points |
| Operating result / margin | €1.003bn / 23.2% | €939.4m / 23.2% | Operating result +6.8% |
| Profit before tax | €695.7m | €712.8m | -2.4% |
| Consolidated profit | €661.3m | €544.5m | +21.4%; reported 2017 tax expense was unusually low |
| Profit attributable to parent / EPS | €662.7m / €0.97 | €545.5m / €0.80 | EPS +21.3% |
| Operating cash flow | €841.7m | €553.3m | Improved; interest paid was €207.1m |
| Investing cash flow | (€2.186bn) | (€506.7m) | Includes major acquisition spending |
| Cash and cash equivalents | €886.5m | €895.0m | Nearly unchanged |
| Financial liabilities | €6.057bn | €4.942bn | Current and non-current debt; approximate net debt was €5.17bn after cash |
Current assets were €2.945bn versus current liabilities of €978.0m. Available credit under debt agreements was approximately €380m, including about €250m of undrawn revolving capacity. No EBITDA figure is stated in the supplied filing text.
Material changes versus 2016
- Hologic’s NAT donor-screening business was acquired on January 31, 2017 for $1.865bn. It contributed to improved gross margin and was expected to improve Diagnostic profitability through integration, although Grifols already recorded the associated customer-facing sales before the acquisition.
- Revenue grew across the principal divisions: Bioscience +7.3%, Diagnostic +5.9%, Hospital +3.3% and Bio Supplies +16.7%, on the filing’s comparable segment presentation.
- Cost of sales rose only 1.3%, and its share of revenue fell to 50.2% from 52.8%. R&D expense rose 45.9% to €288.3m, including a specific €63.7m impairment related to Aradigm; excluding that impairment, R&D was €223.7m.
- Finance result worsened to a €287.7m expense from €233.6m, reflecting higher debt after the Hologic transaction and impairment-related items. Profit before tax declined despite higher operating profit.
- Net cash from investing activities was affected by €1.857bn of investments in group companies and business units. Financing activities provided €1.434bn, principally supporting the acquisition and refinancing.
- Other comprehensive income swung to a €549.4m loss from €102.3m income, principally due to translation differences; total comprehensive income fell to €111.9m from €646.8m.
Outlook, commentary, risks and unusual items
- Management expected long-term global plasma-derivative market sales growth of 6%–7% annually, citing demand, diagnosis, new indications and geographic expansion. This is a market expectation, not quantified company revenue guidance.
- Management expected R&D spending to run at 5%–6% of net revenue in the near term. A €1.2bn investment plan for 2016–2021 includes approximately $360m to expand Bioscience manufacturing capacity; a new Clayton fractionation plant was targeted for 2022.
- Management said operating cash flow, cash balances and available credit were expected to fund obligations, working capital and capital expenditures for at least the next 12 months. It also anticipated rising working-capital needs as the business grows.
- U.S. tax reform produced a reported €171.6m net positive effect on 2017 results through remeasurement of deferred tax balances. The reported effective tax rate was 4.9%; management cited 27.3% excluding specified unusual tax effects and transaction-related items.
- Leverage is material: most debt was long-term, a substantial portion bore variable rates, and a 100-basis-point rate increase was estimated to raise 2017 interest expense by €53m. Debt agreements include covenants and restrictions, including on dividends.
- Key operating risks include plasma supply and donor-center disruption, manufacturing contamination or regulatory noncompliance, product safety/liability, competition and pricing pressure, reimbursement changes, foreign-exchange exposure, facility or supplier disruption, and dependence on successful capacity expansion and product development. The new U.S. 340B reimbursement rule, effective January 2018, reduced certain provider reimbursement from ASP plus 6% to ASP minus 22.5%; its business effect was uncertain.
- Two patent infringement suits involving Procleix products were pending. Grifols also described an internal FCPA review relating to acquired businesses; the DOJ closed its inquiry into Grifols in 2016, while the company said it continued reviewing potential irregular practices. Management stated ordinary-course legal matters were not expected to materially affect results.
- After year-end, Grifols acquired a 51% stake in MedKeeper for $98m and agreed to acquire German plasma collector Haema for €220m, subject to closing conditions and regulatory approval.
Most important facts for investors to verify
- Reconcile the €661.3m consolidated profit and €662.7m parent-attributable profit, and assess normalized earnings excluding the U.S. tax reform benefit and Aradigm impairments.
- Review the Hologic purchase-price allocation, goodwill increase, integration costs and realized contribution to margins and cash generation.
- Track debt maturity, covenant headroom, variable-rate exposure, refinancing terms and the effect of acquisition financing on net leverage.
- Assess whether plasma collection and manufacturing capacity can support growth without further margin pressure or delays in regulatory approvals.
- Monitor IVIG concentration, competitive pricing, reimbursement developments and the effect of currency movements on reported results.
- Check the status and financial exposure, if any, from the Procleix patent litigation, FCPA-related reviews and the proposed Haema acquisition.
The filing states that disclosure controls and internal control over financial reporting were effective at year-end; the auditor issued unqualified opinions on the consolidated financial statements and internal control.